Assignment:
Answer the following questions:
1. Write down the modern Phillips Curve equation and explain what each term means. Which tradeoff is captured by the Phillips Curve? Draw a graph showing this tradeoff i.e. draw the Phillips curve.
2. Define demand-pull inflation. What condition in the Phillips Curve equation needs to be satisfied to characterize inflation as demand-pull?
3. According to the Phillips Curve equation, what is the expression for inflation rate when cyclical unemployment is zero?
4. What is the assumption of Adaptive Expectations? How do you modify the Phillips Curve equation to incorporate Adaptive Expectations?
5. What are the inside lag and the outside lag? Which has the longer inside lag-monetary or fiscal policy? Which has the longer outside lag? Why?
6. Why would more accurate economic forecasting make it easier for policymakers to stabilize the economy? Describe two ways economists try to forecast developments in the economy.
7. Describe the Lucas critique.
8. When cities pass laws limiting the rent landlords can charge on apartments, the laws usually apply to existing buildings and exempt any buildings not yet built. Advocates of rent control argue that this exemption ensures that rent control does not discourage the construction of new housing. Evaluate this argument in light of the time-inconsistency problem.
Readings:
Macroeconomics
By N. Gregory Mankiw