Consider an Economy in Long-Run Equilibrium with an Inflation Rate

question 88

Essay

Consider an economy in long-run equilibrium with an inflation rate (π)of 0.08 per year and a natural unemployment rate of 0.05.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 - 0.05).
Consider a two-year disinflation.In the first year,π = 0.06 and π^e = 0.08.In the second year,π = 0.04 and π^e = 0.05.
(a)In the first year,what is the value of the unemployment rate?
(b)In the first year,by what percentage does output fall short of full-employment output?
(c)In the second year,what is the value of the unemployment rate?
(d)In the second year,by what percentage does output fall short of full-employment output?
(e)What is the sacrifice ratio for this disinflation?

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Definitions:

Gamete

A fully developed single-set chromosome male or female reproductive cell capable of merging with its counterpart from the opposite gender to produce a zygote through sexual reproduction.

Haploid

A cell or nucleus having a single set of unpaired chromosomes, typical of gametes.

Diploid

A diploid cell is one that contains two complete sets of chromosomes, one from each parent, which is the characteristic number of chromosomes for most organisms' body cells.

Gamete Formation

The process by which gametes, or sex cells, are produced, involving meiosis, resulting in cells with half the original number of chromosomes.