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SIMON FRASER ECON291 tut13a (2)

SIMON FRASER ECON291 tut13a (2) - Economics 291 Canadian...

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Economics 291: Canadian Macroeconomic Policy Practice final 1. Consider the following Philips curve: 2( 6%) e u π π = - - . a. Calculate the natural rate of unemployment. b. Suppose the expected inflation rate is 2%. Policy maker wants to lower the unemployment rate by 1 percentage point in the short run in order to win re-election. Explain what kind of policy should be used in order to achieve this policy goal. c. Can the policymaker lower the unemployment rate by 1 percentage point permanently? Explain. The natural rate of unemployment is 6%. In the short run, 5% unemployment rate can be achieved by an unexpected increase in money supply (as inflation rate is 4%). Policy maker cannot exploit the Philips relationship permanently. In the long run, unemployment rate is equal to the natural rate, 6%. 2. “It is plain to see that discretion is a better way to run monetary policy than following a rule because a policy of discretion gives the central bank the ability to react to news about the economy.” Evaluate this statement.
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