EC111Class16Questions - (e What does the...

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EC111 MACROECONOMICS Spring Term 2012 EC111 Class Exercise 16 1. Suppose the economy and money supply are growing at 5% per year. (a) Explain why a classical economist would conjecture that there is no inflation. (b) What would you suspect is occurring if the economy is experiencing inflation? 2. (a) What gives rise to a downward sloping relationship between nominal wage and change and unemployment (the Phillips curve)? (b) Why would you expect the Phillips Curve to become flatter at higher unemployment rates? (c) Why would you expect the level of expected price change to shift the short-run Phillips curve? (d) Why is the long run Phillips curve vertical?
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Unformatted text preview: (e) What does the expectations-augmented Phillips curve imply for the trade off between unemployment and inflation faced by policymakers? 3. (a) How can an increase the average duration of unemployment lead to a higher unemployment rate? (c) Discuss how a reduction in unemployment insurance benefits can reduce unemployment. Are there reasons why such a reduction could increase long-run aggregate output? 4. Why do some economists consider uncertainty to be the primary cost of inflation? 5. Explain how the Bank of England’s policy of inflation targeting is related to the expectations augmented Phillips curve....
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