SIMON FRASER ECON291 tut12 (1)

SIMON FRASER ECON291 tut12 (1) - determined this way, but...

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Economics 291: Canadian Macroeconomic Policy Tutorial #12 (week of Nov 30) 1. What costs are associated with unanticipated inflation? Who loses and who gains when inflation is higher than expected? 2. Suppose the natural rate of unemployment is 6% and that the expected inflation rate is 5%. Compare and contrast the effects of an unanticipated and anticipated increase in money supply. 3. Should zero inflation be a goal? Should zero unemployment be a goal? Justify your answer. 4. Suppose expected inflation in the economy is 5%. Banks set nominal interest rates so they will earn a 2% expected return. Employers set nominal wages based on a 2% expected real wage increase. Suppose the nominal interest rate and nominal wages are
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Unformatted text preview: determined this way, but actual inflation turns out to differ from the expected inflation rate. Calculate the actual real interest rate and percentage increase in the real wage for each of the following actual inflation rates: (a) 2%, (b) 5%, and (c) 10%. 5. Suppose Okuns Law holds and a one percentage point increase in the unemployment rate reduces real output by 2% of full-employment output. The expectations-augmented Phillips curve is given by 2( 0.05) e u =--. Suppose 0.06 = and 0.02 e = . a. What is the natural rate of employment? b. What is the actual rate of unemployment? c. How much is the actual GPD compared to the full-employment GDP?...
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