31410f1ps4 - Economics 314-1 Fall 2011 Problem Set 4 Due on...

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Economics 314-1 Fall 2011 Problem Set 4 Due on Wednesday November 9 Question 1: Suppose that an economy has the Phillips curve π = π -1 -0.4(u – 0.05). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relationships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 2 percentage points? Using Okun’s law, compute the sacrifice ratio. d. Inflation is running at 4 percent. The Fed wants to reduce it to 2 percent. Give two scenarios that will achieve that goal. Question 2: Suppose that the economy is initially at a long-run equilibrium. Then the Fed increases the money supply. a. Assuming any resulting inflation to be unexpected, explain any changes in GDP, unemployment, and inflation that are caused by the monetary expansion. Explain your conclusions using three diagrams: one for the IS-LM model, one for the AD- AS model, and one for the Phillips curve. b.
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31410f1ps4 - Economics 314-1 Fall 2011 Problem Set 4 Due on...

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