Handout 9

# Handout 9 - An economy is described by the following...

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Econ 3140-2 Fall 2009 Handout #9 1. (Question Three from Abel et.al., Chapter 12, numerical problems) In a certain economy the expectations-augmented Phillips curve is = e 2 ( u u ) and u = 0 : 06 (a) Graph the Phillips curve of this economy for an expected in&ation rate of 0 : 10 . If the Fed chooses to keep the actual in&ation rate at 0 : 10 , what will be the unemployment rate? (b) An aggregate demand shock (resulting from increased military spending) raised expected in&ation to 0 : 12 (the natural employment rate is una/ected). Graph the new Phillips curve and compare it to the curve you drew in Part ( a ) . What happens to the unemployment rate if the Fed holds actual in&ation at 0 : 10 ? What happens to the Phillips curve and the unemployment rate if the Fed announces that it will hold in&ation at 0 : 10 after the aggregate demand shock, and this announcement is fully believed by the public? (c) Suppose that a supply shock (a drought) raises expected in&ation to 0 : 12 and raises the natural unemployment rate to 0 : 08 . Repeat Part ( b ) . 2. (Question Four from Abel et.al., Chapter 12, numerical problems)
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Unformatted text preview: An economy is described by the following equations: AD Y = 4000 + 2 & M P ± SRAS Y = Y + 100( P & P e ) Okun±s law ( Y & Y ) Y = & 2 ( u & u ) In this economy full employment output equals Y = 6000 and the natural unemploy-ment rate u equals : 05 . (a) Suppose that the nominal money supply has long been constant at M = 4000 and is expected by the public to remain constant forever. What are the equilibrium values of the price level P , the expected price level P e , expected in&ation & e , output Y , and the unemployment rate u ? (b) A totally unexpected increase in the money supply occurs, raising it from 4000 to 4488 . What are the short-run equilibrium values of the price level, expected price level, output, and unemployment rate? What are the values of cyclical unemployment and unanticipated in&ation? (c) What is the slope of the expectations-augmented Phillips curve (equal to & h in Eq. 12.1) in this economy? 1...
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