Question

Question 3 A Philips curve is represented by the following relationship: where s is a supply shock term, on average equal to zero. Draw the Phillips c when U-7% and underlying inflation 3% and 6%. Okun's Law is U-U-0.5 (Y-Y)/Y Draw the aggregate supply schedule when Y-10,000. Question 4 Using the conditions of the above exercise, show the impact of supply shocks s 5%, and s-200. Separately show the effect of raising Ỹ to 10,200. Why is it for both inflation and employment?

SAME TASK AS WRITTEN:

3.a) A Philips curve is represented by the following relationship:

π = ?̃ – 10(U – ?̅) + s, where s is a supply shock term, on average equal to zero.

Draw the Phillips curve when ?̅ = 7% and underlying inflation ?̅ = 3% and 6%.

Okun’s Law is

U – ?̅ = -0.5 (Y – ?̅)/?̅.

Draw the aggregate supply schedule when ?̅ = 10,000.

3. B) Using the conditions of the above exercise, show the impact of supply shocks s = 5%, and s = -2%. Separately show the effect of raising ?̅ to 10,200. Why is it argued that improving the performance of the supply side of the economy is good for both inflation and employment?

Answer 1

The equation of the Philips curve is given as- pi = pi^e - beta (u - u^bar) + v, v > 0 is the supply shock In the short run, pi^e is a parameter r pi^e notequalto pi slope of Philips curve = partial differential pi/partial differential u = -beta < 0 In the long run, pi = pi^e. Assuming v = 0, mu = u^bar So, unemployment of its natural rate r the Philips curve is vertical GIVEN: pi = pi^~ - 10(u - u^bar) + s, E(s) = 0 equation (1) slope of Philips curve = partial differential pi/partial differential u = -10 u^bar = 7%: pi^~ = 3% Equation (1) becomes- pi = 0.03 - 10(u - 0.07) + s pi = 0.03 - 10 u + 0.07 + s pi + 10 u = 0.73 + s The curve will shift left or right depending on the value of the parameter s. mu^bar = 7%, pi^~ = 6% Equation (1) becomes- pi = 0.06 - 10(u - 0.07)