Macro Problem - Trade-Off Between Inflation, Unemployment and GDP
In this problem we start off with a simple Phillips Curve and we calculate the natural rate of unemployment. Then, given a policy goal to decrease inflation, we find what increase in unemployment is required and (using Okun's Law) what decrease in GDP is required to achieve our inflation goal. Lastly, we calculate the sacrifice ratio.
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Suppose that an economy has the Phillips curve
π_(t)=π_(t-1)-0.5(u_(t)-0.06)
a. What is the natural rate of unemployment?
b. Graph the short run and long-run relationships between inflation and unemployment.
c. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun's law compute the sacrifice ratio.
d. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.
from Mankiw's Macroeconomics (8th ed) question 1, from Chapter 14 - Aggregate Supply, and the Trade-off Between Inflation and Unemployment
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Пікірлер: 12
You sir are a gentleman and a scholar. A genuine thank you for these informative videos
This should come handy for exam prep, thanks!
really good one thanks alot
thanks a lot! really helped
How did you get the 20% from Okuns law part? Would it not be 32% (0.32) Sorry if this is a stupid question, I just dont see where the 0.20 came from.
@timnatasheilah
2 жыл бұрын
I have the same question as you...
Wow this was great. Thanks!
@economicurtis
6 жыл бұрын
Thanks. who says six year old videos can't be useful?
Yea how do you get 20%?
@economicurtis
10 жыл бұрын
Hi Fabrice Anthony. Unemployment started out at 0.06 and needs to go up to 0.16 to get the desired inflation. Thus the required change in u is 0.10 (just 0.16 - 0.06). Thus with Okun's Law, to get that 0.10 chg in unemployment we need the 0.20 change in GDP. Sorry I skipped over that part in the video!
Recorded 8 years ago, here it has helped me to do the needful in my study of economics. Thank you sir. Kindly assist me with your email address