2. Suppose that the Phillips curve in an economy is defined by the following equation: *=,-0.5(-6) where it is the rate of inflation (in per cent). E, is the expected rate of inflation and is the rate of unemployment (in percent), Suppose that in this cconomy, people form inflation expectations by taking a weighted average of the previous two years of inflation: Ne=0.76.1 +0.31-3 Suppose that the general verison of Okun's luw. which relates output growth year-on-year changes in unemployment (- 12) is given by: Y-Y = 3-2-1-2) Y a) Assume that the economy has been at the natural rate of unemployment for sometime, and that the rate of inflation has been stable at 5 per cent for several years. Use the Phillips cune equation to determine the natural rate of unemployment for this economy. Be sure to show all your calculations. b) Now suppose that due to a financial crisis, there is a fall in aggregate demand which causes a recession. As a result, the actual rate of unemployment rises above the natural rate by 4 pereentage points. Use the Phillips curve equation to determine the new rate of inflation in the economy. Show your calculations. C) Suppose that unemployment remains at the higher level specified in part (b) for two years the initial year described in part b(call this initial year. year and one more year (call this year 1). After that, the economy returns to its natural rate of unemployment. Create a table showing the unemployment rate (u); the actual inflation rate (e); the expected inflation rate (4.) and the growth rate of output for 10 years beginning two years before the recession (call the two pre-recession years, years-2 and (NOTE (ALSO CONTINUED ON PAGE 33 1) For each year, use the Phillips curve equation to determine the actual inflation rate: the equation for inflationary expectations to determine the expected rate of inflation: and the equation for Okun's law to determine the growth rate of output: 2 2) You would find it more convenient to perform these calculations on an Excel spreadsheet. In our table only present your final answers) d) Compare the natural rate equilibrium that prevailed before the recession with the post- recession natural rate equilibrium. In percentage point terms, by how much has inflation changed? How many percentage points of output are lost during the transition Determine this economy's sacrifice ratio. Be sure to show your calculations. 2. Suppose that the Phillips curve in an economy is defined by the following equation: *=*, -0.5(4-6) where is the rate of inflation (in per cent), He is the expected rate of inflation and u is the rate of unemployment (in per cent), Suppose that in this economy, people form inflation expectations by taking a weighted average of the previous two years of inflation: Te = 0.71_1 +0.311-2 Suppose that the general verison of Okun's law, which relates output growth ( , 2) to year-on-year changes in unemployment (u - __) is given by: Y - Y1 = 3 -2(u - 11__) Y-1 a) Assume that the economy has been at the natural rate of unemployment for sometime, and that the rate of inflation has been stable at 5 per cent for several years. Use the Phillips curve equation to determine the natural rate of unemployment for this economy. Be sure to show all your calculations. b) Now suppose that due to a financial crisis, there is a fall in aggregate demand, which causes a recession. As a result, the actual rate of unemployment rises above the natural rate by 4 percentage points. Use the Phillips curve equation to determine the new rate of inflation in the economy. Show your calculations. c) Suppose that unemployment remains at the higher level specified in part (b) for two years the initial year described in part b(call this initial year, year 0); and one more year (call this year 1). After that, the economy returns to its natural rate of unemployment Create a table showing the unemployment rate (u); the actual inflation rate (n); the expected inflation rate (Te); and the growth rate of output for 10 years, beginning two years before the recession (call the two pre-recession years, years -2 and -1). (NOTE (ALSO CONTINUED ON PAGE 3): 1) For each year, use the Phillips curve equation to determine the actual inflation rate; the equation for inflationary expectations to determine the expected rate of inflation; and the equation for Okun's law to determine the growth rate of output; 2 (NOTE (ALSO CONTINUED ON PAGE 3): 1) For each year, use the Phillips curve equation to determine the actual inflation rate; the equation for inflationary expectations to determine the expected rate of inflation; and the equation for Okun's law to determine the growth rate of output; 2 2) You would find it more convenient to perform these calculations on an Excel spreadsheet. In your table, only present your final answers) d) Compare the natural rate equilibrium that prevailed before the recession with the post- recession natural rate equilibrium. In percentage point terms, by how much has inflation changed? How many percentage points of output are lost during the transition? Determine this economy's sacrifice ratio. Be sure to show your calculations. 2. Suppose that the Phillips curve in an economy is defined by the following equation: *=,-0.5(-6) where it is the rate of inflation (in per cent). E, is the expected rate of inflation and is the rate of unemployment (in percent), Suppose that in this cconomy, people form inflation expectations by taking a weighted average of the previous two years of inflation: Ne=0.76.1 +0.31-3 Suppose that the general verison of Okun's luw. which relates output growth year-on-year changes in unemployment (- 12) is given by: Y-Y = 3-2-1-2) Y a) Assume that the economy has been at the natural rate of unemployment for sometime, and that the rate of inflation has been stable at 5 per cent for several years. Use the Phillips cune equation to determine the natural rate of unemployment for this economy. Be sure to show all your calculations. b) Now suppose that due to a financial crisis, there is a fall in aggregate demand which causes a recession. As a result, the actual rate of unemployment rises above the natural rate by 4 pereentage points. Use the Phillips curve equation to determine the new rate of inflation in the economy. Show your calculations. C) Suppose that unemployment remains at the higher level specified in part (b) for two years the initial year described in part b(call this initial year. year and one more year (call this year 1). After that, the economy returns to its natural rate of unemployment. Create a table showing the unemployment rate (u); the actual inflation rate (e); the expected inflation rate (4.) and the growth rate of output for 10 years beginning two years before the recession (call the two pre-recession years, years-2 and (NOTE (ALSO CONTINUED ON PAGE 33 1) For each year, use the Phillips curve equation to determine the actual inflation rate: the equation for inflationary expectations to determine the expected rate of inflation: and the equation for Okun's law to determine the growth rate of output: 2 2) You would find it more convenient to perform these calculations on an Excel spreadsheet. In our table only present your final answers) d) Compare the natural rate equilibrium that prevailed before the recession with the post- recession natural rate equilibrium. In percentage point terms, by how much has inflation changed? How many percentage points of output are lost during the transition Determine this economy's sacrifice ratio. Be sure to show your calculations. 2. Suppose that the Phillips curve in an economy is defined by the following equation: *=*, -0.5(4-6) where is the rate of inflation (in per cent), He is the expected rate of inflation and u is the rate of unemployment (in per cent), Suppose that in this economy, people form inflation expectations by taking a weighted average of the previous two years of inflation: Te = 0.71_1 +0.311-2 Suppose that the general verison of Okun's law, which relates output growth ( , 2) to year-on-year changes in unemployment (u - __) is given by: Y - Y1 = 3 -2(u - 11__) Y-1 a) Assume that the economy has been at the natural rate of unemployment for sometime, and that the rate of inflation has been stable at 5 per cent for several years. Use the Phillips curve equation to determine the natural rate of unemployment for this economy. Be sure to show all your calculations. b) Now suppose that due to a financial crisis, there is a fall in aggregate demand, which causes a recession. As a result, the actual rate of unemployment rises above the natural rate by 4 percentage points. Use the Phillips curve equation to determine the new rate of inflation in the economy. Show your calculations. c) Suppose that unemployment remains at the higher level specified in part (b) for two years the initial year described in part b(call this initial year, year 0); and one more year (call this year 1). After that, the economy returns to its natural rate of unemployment Create a table showing the unemployment rate (u); the actual inflation rate (n); the expected inflation rate (Te); and the growth rate of output for 10 years, beginning two years before the recession (call the two pre-recession years, years -2 and -1). (NOTE (ALSO CONTINUED ON PAGE 3): 1) For each year, use the Phillips curve equation to determine the actual inflation rate; the equation for inflationary expectations to determine the expected rate of inflation; and the equation for Okun's law to determine the growth rate of output; 2 (NOTE (ALSO CONTINUED ON PAGE 3): 1) For each year, use the Phillips curve equation to determine the actual inflation rate; the equation for inflationary expectations to determine the expected rate of inflation; and the equation for Okun's law to determine the growth rate of output; 2 2) You would find it more convenient to perform these calculations on an Excel spreadsheet. In your table, only present your final answers) d) Compare the natural rate equilibrium that prevailed before the recession with the post- recession natural rate equilibrium. In percentage point terms, by how much has inflation changed? How many percentage points of output are lost during the transition? Determine this economy's sacrifice ratio. Be sure to show your calculations
