Is in relation to the efficiency of labor and that it

Info icon This preview shows pages 2–3. Sign up to view the full content.

View Full Document Right Arrow Icon
is in relation to the efficiency of labor and that it will continue to decrease due to a continual growth in the efficiency of labor in the long run. Then, in the markdown cell below the code cell, after the "TH15" prompt, explain to somebody who has never taken this course why a central bank interested in maximum feasible employment and price stability would rather face a Phillips Curve in which inflation expectations are close to static and thus, as the Federal Reserve puts it, "well anchored". The Phillips curve gives us a relation between the inflation rate and the unemployment rate. When given the natural rate of unemployment and expected inflation, the Phillips curve passes through the point where current inflation is equal to expected inflation and unemployment is equal to it the natural rate of unemployment. Although the natural rate of unemployment is relatively agreed upon and taken as given, the expected inflation can take on different forms, namely: static, adaptive, rational, or a combination thereof. Static expectations are seen when people ignore the fact that inflation can change, Adaptive expectations form when the future is assumed to be like the past, and rational expectations occur when opinions about the future form by using all information about the structure of the economy and the likely course of government policy. In the exercise we observe three different methods of determining future expectations: (i) half static and half adaptive, (ii) strictly adaptive, (iii) half rational and half adaptive. If the central bank is interested in maximum feasible employment (unemployment equal to the natural rate of unemployment) and stable price the results of the half static and adaptive model for expected inflation prevails. We notice that after 10 years, inflation remains almost exactly at the year 0 inflation rate of 0.02 or equivalently the inflation anchor. In a strictly static model, the trade-off between inflation and unemployment in the short run does not change from year to year resulting in stable prices from year to year. When then calculating the unemployment rate, we notice that the year 10 unemployment rate is equal to the natural rate of unemployment. Again, this is due to the fact that the trade-off between inflation and unemployment remains unchanged from year to year in a static model, causing inflation to be stable and leading businesses to ignore inflation. Note that this maximum employment and price stability occur in the short run static expectation of inflation as the long-run does not exist and will result of large gaps between expected inflation and actual inflation.
Image of page 2

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern