The Expectations-Augmented Phillips Curve Is

question 16

Essay

The expectations-augmented Phillips curve is
π = π^e - 3(u - 0.05).
(a)Graph the long-run Phillips curve and the short-run Phillips curve for an expected inflation rate of 0.03.If the Fed chooses to keep the actual inflation rate at 0.03,what will be the unemployment rate? Label the equilibrium point "A".What is the numerical value of the natural rate of unemployment?
(b)An aggregate demand shock (resulting from increased exports of goods)raises the inflation rate to 0.06 (the natural rate of unemployment and the expected inflation rate are not affected).Show what happens on your graph.Label the equilibrium point "B".What is the numerical value of the unemployment rate?
(c)In response to the aggregate demand shock,suppose the Fed allows the inflation rate of 0.06 to persist.Show what happens on your graph,labeling the equilibrium point "C".In the long run,what is the numerical value of the unemployment rate?
(d)From the situation in part (c),suppose a supply shock (an oil price increase)raises the natural rate of unemployment by .01 from its original value.If the expected inflation rate does not change,show what happens in your graph,labeling the equilibrium point "D".

Demonstrate the ability to solve real-world problems involving single sums and annuities using appropriate financial formulas.

Recognize the importance of interest rates, compounding periods, and time in financial planning and decision-making.

Understand the fundamental concepts of probability including experiment, outcome, sample space, and event.

Calculate z-values for normally distributed data.

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Definitions:

Validity Error

A discrepancy or mistake that affects the accuracy or truthfulness of a test's results.

Content Validity

The extent to which a test or measure represents all facets of a given construct or domain.

Given Construct

A given construct refers to a specific concept or theoretical idea that is established and used as a basis for research or analysis.

Content Validity Ratio

A ratio of the number of raters who evaluate an item and the number of raters who deem an item to be an essential component of the construct being measured.