Keynesians argue greater emphasis on the role of aggregate demand in causing

Keynesians argue greater emphasis on the role of

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Keynesians argue greater emphasis on the role of aggregate demand in causing and overcoming a recession. Multiple choices, calculation, true/false (answer with explanation) 1. What will happen with the kinked Phillips curve, price level and unemployment, if economy experiences cost-push inflation and a decrease in equilibrium unemployment at the same time? Illustrate your answer graphically.
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2. The following monetarist equation is given: P t =1+2(1/U)+P te , where: P t – percentage annual rate of inflation in year t; P te – expected rate of inflation in year t; U – percentage rate of unemployment. Let’s assume that the rate of inflation is changing every year for 1 percent, starting from year 2 Fill in the table below assuming that in year 1 expected rate of inflation is zero. Years U P t 1 2 3 4 5 6 5 4 3 2 P1= 1+2*1/6 + 0 = 1,333 P2= 1+2*1/5 + 1,333 = 2,733 P3= 1+2*1/4 + 2,733 = 3,5 P4= 1+2*1/3 + 3 = 4,666 P5= 1+2*1/2 + 4 = 6 Comment on the monetarist interpretation of the relationship between unemployment and inflation. The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa A monetarist would argue that: Unemployment is a supply-side phenomena Using demand-side policies can only temporarily reduce unemployment by an ever- accelerating inflation rate. Unemployment is determined by the natural rate of unemployment
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3. The rational expectations theory suggests that demand-management policies influence real output and employment only in the short run, not in the long run ( True / False). Comment your answer. Rational expectations theory developed largely out of the debates around the NRH. The central point can be made very simply: if employers and works understand the way world works – that is understand the correct theory – then they will short-cut the adjustment process and move directly to the equilibrium. So, government policies will have no impact on employment and output, and can affect only prices, even in the short-run 4. According to Monetarists, attempts of the government to decrease the unemployment rate below its natural level can lead to stagflation ( True / False).
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