Handout 9 Key

# Handout 9 Key - Econ 3140-2 Fall 2009 Handout#9 Answer Key...

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Econ 3140-2 Fall 2009 Handout #9 Answer Key 1. (Question Three from Abel et.al., Chapter 12, numerical problems) (a) = 0 : 10 2( u & 0 : 06) = 0 : 22 2 u This is shown as the Phillips curve labeled PC a If the Fed keeps in±ation at 0 : 10 , then the natural rate of unemployment will be u = 0 : 06 . (b) With expected in±ation rising to 12% , the Phillips curve is: = 0 : 12 2( u & 0 : 06) = 0 : 24 2 u . This is the Phillips curve labeled PC b The higher rate of expected in±ation has caused the curve to shift up relative to where it was in Part ( a ) . With the actual in±ation rate at 10% , the Phillips curve equation is 0 : 10 = 0 : 12 2( u & 0 : 06) , which has the solution u = 0 : 07 . So if the Fed tries to maintain the existing rate of in±ation after a shock has raised in±ation expectations, the unemployment rate increases. However, if the Fed could convince people that the in±ation rate really would not rise, so that e remains at 0 : 10 , then the short-run Phillips curve would remain

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## This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell.

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Handout 9 Key - Econ 3140-2 Fall 2009 Handout#9 Answer Key...

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