ECOS2002 - Tutorial 7
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
ECOS2002 - Tutorial 7
1. Discuss the following statements:
(a) The Phillips curve implies that when unemployment is high, inflation is low, and vice versa. Is it true then, that we may experience either high inflation or high unemployment, but we will never experience both together?
(b) What did Milton Friedman imply when he said his famous quote: Inflation is always and everywhere a monetary phenomenon.
2. Suppose that the Phillips curve is given by:
πt = πt(e) + 0.1 − 2ut
Assume πt(e) = θπt − 1 and suppose that θ is initially equal to zero. Suppose that the rate of unemployment is initially equal to the natural rate. In year t the authorities
decide to bring the unemployment rate down to 3 per cent and hold it there forever. (a) Determine the rate of inflation in years t, t + 1, t + 2, t + 5.
(b) Do you believe the answer given in (a)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.)
Now suppose that in year t + 5, θ increases from 0 to 1 . Suppose that the government is still determined to keep u at 3 per cent forever.
(c) Why might θ increase in this way?
(d) What will the inflation rate be in years t + 5, t + 6, t + 7 ?
(e) Do you believe the answer given in (d)? Why or why not?
3. The macroeconomic effects of the indexation of wages: Suppose that the Phillips curve is given by
πt − πt(e) = 0.1 − 2ut
where
πt(e) = πt − 1
Suppose inflation in year t– 1 is zero. In year t, the authorities decide to keep the unemployment rate at 4 per cent forever.
(a) Calculate the rate of inflation for years t, t + 1, t + 2 and t + 3.
Now suppose that half the workers have indexed labour contracts . (b) What is the new equation for the Phillips curve?
(c) Answer (a) again.
(d) What is the effect of wage indexation on the relation between π and u?
(e) What happens if the share of workers that have wage indexed contracts in- creases?
4. Discussion
Some economists point out that the US Phillips curve has changed in recent years. In fact, while the unemployment rate has steadily declined, inflation has also re- mained low — even below the Fed’s 2% target for most of the period. This sug- gests that the Phillips curve has ’flattened,’ or that the relationship might not be as strong as it once was.
Can you think of any reasons for this ’flattening’ of the Phillips Curve?
2023-01-09