15. A central bank pledges to reduce the inflation rate from 20% to 5%. People reduce their inflation expectations to 10%, but the central bank only reduces inflation to 15%. What happens to the unemployment rate? 16. Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 2%.
Added by Mohamed M.
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People had initially reduced their inflation expectations to 10%. Since the actual inflation rate is lower than expected, real wages will fall, leading to a decrease in unemployment. ** Show more…
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Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case. a. Actual inflation is 5 percent, and expected inflation is 3 percent. b. Actual inflation is 3 percent, and expected inflation is 5 percent. c. Actual inflation is 5 percent, and expected inflation is 5 percent. d. Actual inflation is 3 percent, and expected inflation is 3 percent.
Suppose the interest rate has been at 3% forever. The central bank decides that it wants the inflation rate to be 2% to try to boost investment. (Assume no other shocks are hitting the economy) 1. Suppose the central bank comes back after a moderate amount of time (a year, maybe). Will the interest rate still be at 2%? What will it find? 2. Suppose the central bank again lowers the rate to 2%. How quickly will the interest rate return to 3% this time? 3. Now the central bank gets mad and decides to lower the rate to 2% and leave it there permanently. How will the central bank have to do this? 4. What will the inflation rate (and interest rate) be after a long time? What happened when the central bank tried to keep the interest rate low?
Manasvee S.
Suppose the government shown in Exhibit 10 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, then a. the economy will remain stuck at point $E_{1}$ b. the natural rate will permanently increase to 8 percent. c. unemployment will rise to 8 percent in the short run. d. Unemployment will remain at 6 percent as the inflation rate falls.
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