Question

1. Disinflation. Suppose a country's current inflation rate is 18%, Central bank wants to reduce the inflation rate to 3% in five years, in other words, a reduction of 3 percentage points per year. Given Okun's law 4-1-0.4(x-3%), Phillips Curve 74-71-(-6%) and nominal money growth gym-7, complete the following table to derive the desired path of disinflation. before Years of disinflation After year Inflation% 18 15 12 9 6 3 Umemployment rate % Output growth Nominal money growth %

Answer 1

Given : U-W-1 =-0.4 (Sye - 0.03) Coken's law) Te – The-y = -(u - 0.06) (Phillip's cwrwe) - gy = gm - Tu (nominal money grown) we use the above equations to calculate the table : for equation to period 1 : T1 = 0.15 To = 0.18 use the u tho in Phillip's wave get us → T - Tho = -( -0.06) = 0.15 -0.18 = -(4 -0.06) -0.03 = -un + 0.06 u = 0.06 +0.03 44 = 0.09 So, unemployment rate in period 1 = 9% Now, we have = 0.09 q uo = 0.06 Use um e no in okun's law to get growth rare gya + 4- 40 = -0.4 (9y2 -0.03) → 0.09 - 0.06 = -0-4 Cgyz - 0.03) → 0.03 = 949 -0.03 -0.4

→ -0-075 - 942 -0.03 -0.075 +0.03 - o.ous So output growth rate is - 4.5% Now, in nominal money Subshhite gyz and the grown equation : Im = gyat The = -0.045 + 0.15 9m = 0.105 to, nominal money grown rate is 10.5% ... in openiod 1, unemployment rate = 9% output growth rare = -4.34 & nominal money 1. growth rare = 10:52 can calculate In for similar all fashion, you the periods.

year	0	1	2	3	4	5	6	7	8
inflation%	18	15	12	9	6	3	3	3	3
unemployment%	6	9	9	9	9	9	6	6	6
output growth%	3	-4.5	3	3	3	3	-4.5	3	3
nominal money growth%	21	10.5	15	12	9	6	-1.5	6	6