1. Currently in the US, inflation as measured by the CPI, is about 1.5% and u is about 7.6%; assume...

Question

1. Currently in the US, inflation as measured by the CPI, is about 1.5% and u is about 7.6%; assume that US un= 6%. Present the appropriate equation(s) (no need to provide all data, just fill in what you can given information above) and best graph to illustrate this u-inflation situation given the following questions. Make all assumptions clear. a.Can you say whether or not actual inflation is equal to expected inflation? Why or why not? Explain. b.Can you say whether or not inflation will rise or fall from its current amount, cet par? Why or why not? Explain. 2.
	
Document Preview: 1. Currently in the US, inflation as measured by the CPI, is about 1.5% and u is about 7.6%; assume that US un= 6%.Present the appropriate equation(s) (no need to provide all data, just fill in what you can given information above) and best graph to illustrate this u-inflation situation given the following questions. Make all assumptions clear.  	a.Can you say whether or not actual inflation is equal to expected inflation? Why or why not?  Explain.	b.Can you say whether or not inflation will rise or fall from its current amount, cet par? Why or why not? Explain.2. If gm = 10 % and gy trend = 5% then what will the rate of inflation be at the end of the MR?  Discuss and explain using the appropriate equations; present appropriate name, if any. Do your best to show what will happen through time in P-Y space. Make any necessary assumptions. 3. The savings rate in the US, s, rose from 3.6% during 2012 Q1 to 4.7% 2012 Q4 (source: “US economic outlook,” April 12, 2013, from bmonesbittburns.com). 	a. What effect, if any, would this increase in s have on US living standards, both their level and growth rate? 			Discuss and explain using an appropriate graph. 	b. What is meant by the “Golden Rule” (GR)? Use the Mankiw Golden Rule graph to discuss whether this increase 		in the US s would have any effect on the GR variables of interest.4. Given the specific assumptions of the models that we have been using, comment on the following statement.  Be sure to refer to a specific result, model or equation to justify your response and provide any appropriate term, if any.“We know that the K stock depends on I, which depends on the interest rate, which is determined in the money market. Thus, the current expansionary MP stance by the Fed should speed up the growth rate of the US economy and favourably affect American citizens’ living standards in the LR.” How would your answer change if the quotation discussed the Fed’s having a positive growth rate of the Money Supply...

David · Accepted Answer

1. Currently in the US, inflation as measured by the CPI, is about 1.5% and u is about 
7.6%; assume that US u
n
= 6%. 
Present the appropriate equation(s) (no need to provide all data, just fill in what you can 
given information above) and best graph to illustrate this u-inflation situation given the 
following questions. Make all assumptions clear.   
 a.Can you say whether or not actual inflation is equal to expected inflation? 
Why or why not?  Explain. 
Answer: 
This situation of US economy can be represented by Phillips curve: 
πt  - πt
e
 = - α (ut – un) 
With u = 7.6%, un = 6%, Phillips curve can be represented as: 
πt  - πt
e
 = - α (7.6%-6%) or 
πt  - πt
e
 = - α 1.6%   ………. (1) 
The graph below shows the Phillips curve with following situation: Currently economy is 
at point A.
As can be noted from equation of Phillips curve (1), the actual inflation is not equal to 
expected inflation. This is because current unemployment rate is greater than natural rate 
of unemployment, which means economy is not working with its full potential and 
current aggregate demand is less than aggregate demand required to achieve full 
employment. And because of that actual inflation in economy would be less than 
expected inflation. 
 b.Can you say whether or not inflation will rise or fall from its current amount, 
cet par? Why or why not? Explain. 
Answer: 
In the current situation, actual inflation is less than expected inflation. So, expectation of 
prices would be revised downward, causing nominal wages to fall and thereby aggregate 
supply to rise. As a result, price level will fall in the economy i.e. inflation will fall from 
its current amount.
2. If gm = 10 % and gy trend = 5% then what will the rate of inflation be at the end of the 
MR?  Discuss and explain using the appropriate equations; present appropriate name, if 
any. Do your best to show what will happen through time in P-Y space. Make any 
necessary assumptions.
Answer: 
As per MR model, gy  = gm – πt 
So, rate of inflation at the end of the MR: πt = gm – gy i.e.

1. Currently in the US, inflation as measured by the CPI, is about 1.5% and u is about 7.6%; assume that US un= 6%. Present the appropriate equation(s) (no need to provide all data, just fill in what...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment