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Chapter 17: Q. 19 (page 396)

Consider panel (b) of Figure 17-4, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. Then the inflation rate decreases to -1 percent. Does additional cyclical, frictional, or structural unemployment account for the resulting rise in the unemployment rate at point C? Explain briefly.

Short Answer

Expert verified

Low (or negative) inflation rates tend to be amid high unemployment rates (as at C).

Step by step solution

01

Given Information

The economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment.

02

Explanation

  • If we glance at both increases and reduces in aggregate demand, we see that prime inflation rates tend to be related to low unemployment rates (as at B)
  • Which low (or negative) inflation rates tend to be amid high unemployment rates (as atC).

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Most popular questions from this chapter

Evaluate the implications of behavioral economics for macro policymaking.

Consider a situation in which a future president has appointed Federal Reserve leaders who conduct monetary policy much more erratically than in past years. The consequence is that the quantity of money in circulation varies in a much more unsystematic and, hence, hard-to-predict manner. According to the policy irrelevance proposition, is it more or less likely that the Fed's policy actions will cause real GDP to change in the short run? Explain.

Why might it be the case that even if distorted beliefs alter real GDP and the unemployment rate today, such beliefs might be unlikely to arise among households and firms again in the future? Explain your reasoning.

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aHow would this affect the actual unemployment rate?

b How would such a change affect estimates of the natural rate of unemployment?

c If this computational change were made, would it in any way affect the logic of the short-run and long-run Phillips curve analysis and its implications for policymaking? Why might the government wish to make such a change?

Explain whether the cyclical unemployment rate is positive, zero, or negative at the point E2, after the shift in the aggregate demand curve from AD1to AD2. In addition, explain whether the cyclical unemployment rate is positive, zero, or negative at a point E3, following the shift in the short-run aggregate supply curve from SRAS, toSRAS.
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