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 ut-ut-1=-0.4(gyt-3%), Phillips Curve t-t-1=-(ut-6%) and nominal money growth gy=gm-, complete the following table to derive the desired path of disinflation.
before |
Years of disinflation |
After |
|||||||
year |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
Inflation % |
18 |
15 |
12 |
9 |
6 |
3 |
3 |
3 |
3 |
Umemployment rate % |
6 |
||||||||
Output growth % |
3 |
||||||||
Nominal money growth % |
21 |
before | Years of disinflation | After | |||||||
year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Inflation % | 18 | 15 | 12 | 9 | 6 | 3 | 3 | 3 | 3 |
Unemployment rate % | 6 | 9 | 9 | 9 | 9 | 9 | 6 | 6 | 6 |
Output growth % | 3 | -4.5 | 3 | 3 | 3 | 3 | 10.5 | 3 | 3 |
Nominal money growth % | 21 | 10.5 | 15 | 12 | 9 | 6 | 13.5 | 6 | 6 |
The calculation is as follows:
1. Disinflation. Suppose a country’s current inflation rate is 18%, Central bank wants to reduce the inflation rate to 3...
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 %
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