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  • Consider An Economy in Long Run Equilibrium With An Inflation Rate

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    trilocksp Singh
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    The document describes an economy initially in long-run equilibrium with 12% inflation and 6% natural unemployment. It then considers the effects of a two-year and four-year disinflation according to given changes in inflation expectations and actual inflation rates. In the two-year disinflation, unemployment rises to 8% and output falls 2% in the first year, while unemployment falls to 7% and output falls 1% in the second year. In the four-year disinflation, unemployment and output costs are provided for each year, with a total sacrifice ratio of 12%.

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    The document describes an economy initially in long-run equilibrium with 12% inflation and 6% natural unemployment. It then considers the effects of a two-year and four-year disinflation according to given changes in inflation expectations and actual inflation rates. In the two-year disinflation, unemployment rises to 8% and output falls 2% in the first year, while unemployment falls to 7% and output falls 1% in the second year. In the four-year disinflation, unemployment and output costs are provided for each year, with a total sacrifice ratio of 12%.

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    45 views1 page

    Consider An Economy in Long Run Equilibrium With An Inflation Rate

    Uploaded by

    trilocksp Singh
    The document describes an economy initially in long-run equilibrium with 12% inflation and 6% natural unemployment. It then considers the effects of a two-year and four-year disinflation according to given changes in inflation expectations and actual inflation rates. In the two-year disinflation, unemployment rises to 8% and output falls 2% in the first year, while unemployment falls to 7% and output falls 1% in the second year. In the four-year disinflation, unemployment and output costs are provided for each year, with a total sacrifice ratio of 12%.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Solved: Consider an economy in long run equilibrium with

    an inflation rate
    Consider an economy in long run equilibrium with an inflation rate

    Consider an economy in long-run equilibrium with an inflation rate n of 12% (0.12) per year and
    a natural unemployment rate u of 6% (0.06). The expectations-augmented Phillips curve is

    Assume that Okun's law holds so that a 1 percentage point increase in the unemployment rate
    maintained for one year reduces GDP by 2.0% of full-employment output.

    a. Consider a two-year disinflation. In the first year, ? = 0.04 and ?e = 0.08. In the second year,
    ? = 0.04 and ?e = 0.04. In the first year, what is the unemployment rate? By what percentage
    does output fall short of full-employment output? In the second year, what is the unemployment
    rate? By what percentage does output fall short of full-employment output?

    b. Now consider a four-year disinflation according to the following table:

    What is the unemployment rate in each of the four years? By what percentage does output fall
    short of full-employment output each year? What is the sacrifice ratio for this disinflation?

    Consider an economy in long run equilibrium with an inflation rate

    ANSWER
    https://solvedquest.com/consider-an-economy-in-long-run-equilibrium-with-an-inflation-rate/

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