Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 16, Problem 1PA
(a)
To determine
Explain the political business cycle pattern of inflation and
(b)
To determine
Explain the political business cycle pattern of inflation and unemployment.
(c)
To determine
Explain the political business cycle pattern of inflation and unemployment in the presence of independent central bank.
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Students have asked these similar questions
Suppose that an economy has the Phillips Curve
π = Tt-1-1.7 (U+- u")
If the policymakers pursue a vigilant inflation reduction policy that lowers inflation by 6% points in one period, how much will
unemployment rise (in percentage points term)?
An economy has the following equation for the Phillips Curve:
π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation:
Okun’s law for this economy is:
Eπ = 0.7π−1 + 0.3π−2
(Y −Y−1)/(Y-1)=3.0−2.0(u−u−1)
Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent.
1. What is the natural rate of unemployment for this economy?
2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A.
3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.
Which of the following is true about the Phillips curve?
The empirical relationship between unemployment and inflation in the US disappeared after the 1970s. This
means that the theoretical Phillips curve does not represent the world well.
For a researcher to identify the theoretical Phillips curve from empirical data, the economy must be subject
to supply shocks.
The empirical Phillips curve implies that a government must choose between either low unemployment and
high inflation or high unemployment and low inflation.
When inflation expectations adjust, the negative empirical correlation between inflation and unemployment
might disappear.
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Similar questions
- In which situation will the economy move to a point on the Phillips curve where unemployment is higher? if the inflation rate increases if the government increases its expenditures if the Bank of Canada decreases the money supply if expected inflation increasesarrow_forwardConsider the US Phillips Curve for the US economy: 1 = n° – a(u – ua), where a = 0.3. a) If the Fed commits to having zero inflation and the public believes it, how much inflation will result from decreasing the unemployment rate by 1 percentage point below the natural rate of unemployment. b) The public stops believing the Fed and now assume expected inflation to be that of question a). How much inflation will result if the Fed tries to again to decrease the unemployment rate by 1 percentage point below the natural rate of unemployment. c) Now assume that the Fed is not going to try to intervene in the unemployment rate anymore, allowing it back to its natural rate. What would the inflation rate be if the public expect the inflation from b)? What would the inflation be in the next periods? Explain d) Explain the problem that the FED faces when the public stops believing that the target inflation will be met.arrow_forwardWhich of the following is true about the Phillips curve? Group of answer choices The empirical relationship between unemployment and inflation in the US disappeared after the 1970s. This means that the theoretical Phillips curve does not represent the world well. For a researcher to identify the theoretical Phillips curve from empirical data, the economy must be subject to supply shocks. The empirical Phillips curve implies that a government must choose between either low unemployment and high inflation or high unemployment and low inflation. When inflation expectations adjust, the negative empirical correlation between inflation and unemployment might disappear.arrow_forward
- The Short-Run Phillips Curve given by T = E (x) – 0.4 (u – 10) + v Suppose that the economy has adaptive expectations and no inflation shocks. If inflation goes down by 3.3 percentage points a year from today, what is the unemployment rate one year from now? Round your answer to the nearest two decimal place. Write your answer in percentage terms so if your answer is 10%, write 10.arrow_forwardIf the Phillips curve in an economy is given by π = π-1-0.5(u-0.02), then it takes 6 percentage points of cyclical unemployment to reduce inflation by 3 percentage points requires 3 percentage points of cyclical unemployment to reduce the rate of inflation by 6 percentage points the natural rate of unemployment is 3% the natural rate of unemployment is 5% the natural rate of unemployment is 6%arrow_forwardPrior to the mid-1970s, many economists thought a higher rate of unemployment would reduce the inflation rate. Why? How does the modern view of the Phillips curve differ from the earlier view?arrow_forward
- The Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.arrow_forwardAssume that the economy of Country X has an actual unemployment rate of 7%, a natural rate of unemployment of 5%, and an inflation rate of 3%. Using the numerical values given above, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point B. Plot the numerical values above on the graph. Assume that the government of Country X takes no policy action to reduce unemployment. In the long run, will each of the following shift to the right, shift to the left, or remain the same? Short-run aggregate supply curve. Explain Long-run Phillips curve. Explainarrow_forwardAssume that expected inflation is based on the following: πet = θπt-1. If θ = 1, we know that A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) the actual unemployment rate will not deviate from the natural rate of unemployment. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.arrow_forward
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