Exam 12: Unemployment and Inflation

Suppose Okun's law holds and a one percentage point increase in the unemployment rate reduces real output by 2% of full-employment output.The expectations-augmented Phillips curve is given by π = π^e - 2.5 (u - 0.04). Suppose π = 0.08 and π^e = 0.03. (a)What is the natural rate of unemployment? (b)What is the actual rate of unemployment? (c)How much is actual GDP compared with full-employment GDP?

A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that

Countries in which the government does not regulate the labor market are likely to have ________ sacrifice ratio.

If a rapid disinflation has a lower sacrifice ratio than a slow disinflation,then reducing inflation is best accomplished by

The negative relationship between unemployment and inflation is known as the

Suppose expected inflation in the economy is 5%.Banks set nominal interest rates so they'll earn a 2% expected real return.Employers set nominal wages based on a 2% expected real wage increase.Suppose the nominal interest rate and nominal wages are determined this way,but actual inflation turns out to differ from the expected inflation rate.Calculate the actual real interest rate and the percent increase in the real wage for each of the following actual inflation rates: a)2%; b)5%; c)10%.

The argument that when policy changes,people's behavior changes so that historical relationships between macroeconomic variables will no longer hold is known as

The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by

Describe the major costs of inflation,being sure to distinguish between anticipated and unanticipated inflation.

In the expectations-augmented Phillips curve,π = π^e - 3(u - $\bar u$ ).If π = 0.03 when π^e = 0.06 and u = 0.06,then $\bar u$ =

One cost of an unanticipated inflation is that it

A COLA is

The relationship between inflation and unemployment is given by π = π^e - 3(u - 0.06). (a)Graph the long-run Phillips curve and three short-run Phillips curves. (b)What is the value of the natural rate of unemployment? (c)If actual inflation is 0.02 and expected inflation is 0.05,what is the unemployment rate? (d)If actual inflation is 0.08 and expected inflation is 0.05,what is the unemployment rate?

According to Okun's law,if full-employment output is $5000 billion,then each percentage point of unemployment sustained for one year reduces output by

Because the natural rate of unemployment is not known precisely,policymakers who use it as a guide for policy must be

The expectations-augmented Phillips curve is π = π^e - 3(u - 0.05). (a)Graph the long-run Phillips curve and the short-run Phillips curve for an expected inflation rate of 0.03.If the Fed chooses to keep the actual inflation rate at 0.03,what will be the unemployment rate? Label the equilibrium point "A".What is the numerical value of the natural rate of unemployment? (b)An aggregate demand shock (resulting from increased exports of goods)raises the inflation rate to 0.06 (the natural rate of unemployment and the expected inflation rate are not affected).Show what happens on your graph.Label the equilibrium point "B".What is the numerical value of the unemployment rate? (c)In response to the aggregate demand shock,suppose the Fed allows the inflation rate of 0.06 to persist.Show what happens on your graph,labeling the equilibrium point "C".In the long run,what is the numerical value of the unemployment rate? (d)From the situation in part (c),suppose a supply shock (an oil price increase)raises the natural rate of unemployment by .01 from its original value.If the expected inflation rate does not change,show what happens in your graph,labeling the equilibrium point "D".

Which of the following forms of unemployment probably imposes the greatest personal costs?

The long-run Phillips curve is

What is the relation between the unemployment rate and the proportion of unemployed workers who have been unemployed for 15 weeks or longer?

When actual inflation is less than expected inflation