Ch9.2 - 6. T he Cost of Disinflation 6. 6. The Cost of...

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The Cost of Disinflation 6.
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. he Cost of Disinflation 6. The Cost of Disinflation 57 ± Since ongoing inflation is generally the result of rapid money growth. The prescription for stopping inflation appears to be simple: Reduce the rate of money growth. ± Unfortunately, the process of disinflation—the reduction of the inflation rate—by slowing money rowth may lead to high unemployment and growth may lead to high unemployment and recession.
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6.1.1 How much unemployment? And for How Long? 58 ± A point-year of excess unemployment is a ifference between the actual and the natural difference between the actual and the natural unemployment rate of one percentage point for one year. ± For example, if u n =6%, an unemployment rate of 8% four years in a row corresponds to 4 x (8- 6)=8 point-years of excess unemployment.
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How much unemployment? And for How Long? 59 ± Assume that α =0.33 and the central bank attempts to reduce inflation from 7% to 2%. ± Reducing inflation in 1 year requires unemployment at 15% above the natural rate.
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How much unemployment? And for How Long? 60 ± Reduce inflation over 2 years (i.e., in year 1, inflation reduces from 7% to 6%, and in year 2, inflation reduces from 6% to 2%). ± What will be the unemployment above the natural rate in 2 years? ± It requires unemployment rate 15% above the qp y natural rate.
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How much unemployment? And for How Long? 61 ± Reduce inflation over 5 years requires unemployment rate 15% above the natural rate.
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.1.2 Policy Implications 6.1.2 Policy Implications 62 ± What are the policy implications?
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This note was uploaded on 02/19/2011 for the course ECON 1021 taught by Professor Kokwanwai during the Fall '08 term at CUHK.

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Ch9.2 - 6. T he Cost of Disinflation 6. 6. The Cost of...

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