Assignment:
Suppose that initially actual and natural real GDP both equal 11,000 and that the rate of inflation is 3.5 percent. Natural real GDP grows by 3 percent per year over the next five years. Actual real GDP decreases by 2 percent in the first year, but then grows by 4 percent in the second year, 5.5 percent in the third year, 4.2 percent in the fourth year, and 3.5 percent in the fifth year. Inflation in years 1-5 equals 3.1 percent 2.2 percent, 1.6 percent, 1.3 percent, and 1.1 percent, respectively.
Calculate natural real GDP for years 1-5
Calculate actual real GDP for years 1-5
Calculate the output ratio for year 1-5
Calculate the cumulative loss of output for years 1-5
Calculate the sacrifice ratio
Suppose that natural real GDP is constant. For every 1 percent increase in the rate of inflation above its expected level, firms are willing to increase real GDP by 2 percent. The output ratio is initially 100 and the inflation rate equals 2 percent.
Based upon the preceding information, draw the short-run Phillips Curve.
What is the growth rate of nominal GDP in the economy?
An Adverse Supply shock raises the inflation rate associated with every output ratio by 3 percentage points.
Draw the new short-run Phillips Curve
The government chooses to follow a neutral policy in response to this shock. What will be the growth rate of nominal GDP? What will be the new rate of inflation? What will be the output ratio?
If the government chooses to follow an accommodating policy what would be the new inflation rate? The output ratio? The growth rate of nominal GDP?
If the government chooses to follow an extinguishing policy, what would be the new inflation rate? The output ratio? The growth rate of nominal GDP?