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?

---

Definitions:

Kübler-Ross

Refers to the Kübler-Ross model, also known as the five stages of grief, which describes a series of emotional stages experienced by terminally ill patients or people who have faced a significant loss.

Denial

A defense mechanism where an individual refuses to accept reality or facts, thereby avoiding dealing with painful feelings or events.

Marxist Perspective

A view that emphasizes the role of class struggle, economic exploitation, and the dialectical process in societal change, based on the theories of Karl Marx.

Societal Suffering

refers to the collective experience of pain, hardship, or adversity by a community or society, often due to social, economic, or political issues.