II. True or False short explanations are needed if False) 2. A positive Phillips curve shock (supply shock) always increases inflation and decreasing output.
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- Suppose that a fall in consumer spending causes a recession. a. Illustrate the changes in the economy using both an aggregate supply/aggregate demand diagram and a Phillips curve diagram. What happens to inflation and unemployment in the short run? (5%) b. Now suppose that over time, expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation– unemployment combinations? (5%)04:11 Expert Q&A all Done 2. (a) Starting from the IS equation, derive an expression for the aggregate demand curve. (b) Starting from the wage and price setting problems, derive a general expression of aggregate supply and the Phillips Curve. (c) Discuss how the past inflation dynamics might affect the Phillips Curve form under adaptive expectations. (d) What changes in (c) if we consider rational expectations?Only typed answer Consider the Phillips curve shown here. In region B: a. inflation equals expected inflation. b. inflation rises above expected inflation. c. there is insufficient demand. d. the output gap is negative.
- ) a. Draw a short run Phillips curve and show the slope of the curve and then explain what it implies for the policy makers?4. Views on the Long-run Phillips Curve Fleur is a macroeconomist who works as a policy maker for a European government. She believes that policy makers can choose from a menu of inflation and unemployment combinations and that the non-accelerating inflation rate of unemployment (NAIRU) varies over time. What school of thought best matches Fleur's viewpoint? Earlier monetarist New classical and OECD economist Persistence Keynesian Hysteresis Keynesian Old KeynesianSuppose the economy is initially in macroeconomic equilibrium, with an output gap of 0%, unexpected inflation of 0%, and inflation expectations of 2%. A war in the Middle East disrupts oil supplies. a. Adjust the accompanying diagram to reflect this development. Set point A at the new combination of the output gap and unexpected inflation. so Unexpected inflation (%) -4 Ņ -6 -10 10 N 4 -5 A Phillips curve 5 10 Output gap (%)
- 1. Study Questions and Problems #1 True or False: The Phillips curve shows the inverse relationship between the interest rate and the quantity of money demanded. True False Assuming the economy's aggregate supply curve is stable and upward sloping, an increase in aggregate demand would employment rate and the inflation rate. the1. Are the implications of the rational and adaptive expectations hypotheses different in the short-run? A.No, because under both theories people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. B.Yes, because under adaptive expectations there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. C.Yes, because under rational expectations theory there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. D. No, because under both theories, there is a significant time….) Suppose people's inflation expectations are subject to ran- dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a random shock with mean zero but deviates from zero when some event beyond past inflation causes expected inflation to change. Also, Ett+1 = πt + nt.
- 4. Adaptive and Rational Expectations a. Suppose you are in the Adaptive Expectations world. Using the following values calculate the first five forecasts (up to the forecast for inflation in year t+5) of expected inflation. The natural rate of inflation is 1%, last year's expectation of this year's inflation is 1%, however just this year's realized inflation was 3%. Assume the error adjustment coefficient is equal to 0.8. b. Repeat part (a) except now use a lambda value of 1.1. What is the key difference you notice between the evolution of inflation forecasts of part (a) and (b)? c. Suppose you are in the Rational Expectations world. There has been a breakthrough in the semiconductor industry, making future computing both cheaper and faster for firms. What should happen to the price and quantity in the corporate bond market? Explain using rational expectations theory.A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, than Inflation rate (%) 12 10 9 8 6 4 0 4 Long run Phillips curve Natural rate 5 E Short run Phillips curve 9 Unemployment rate (%) Unemployment will rise to 8 percent in the short run. The natural rate will permanently increase to 8 percent The economy will remain stuck at point E1. Unemployment will remain at 6 percent as the inflation rate falls.