a.
To calculate: The equilibrium values of price level, expected price level, expected inflation, output and
a.
Answer to Problem 3NP
The equilibrium value of price level is
Explanation of Solution
Given the following data:
AD | |
SRAS | |
Okun’s law |
And,
The given aggregate demand and short run aggregate supply equations are as follows:
Substituting the given values and equate both the equations as follows:
Thus, the equilibrium price level is 4, and also showing that is the same for the equilibrium expected price level.
Thus, equilibrium output is
Introduction: Okun’s Law graph representation helps in defining relationship between unemployment and lossesin the
b.
To calculate: The new short run equilibrium values of the price level, expected price level, output, value of cyclical unemployment and unanticipated inflation.
b.
Answer to Problem 3NP
The short run equilibrium values of the price level
Explanation of Solution
Given that,
Y=
Pe =4,
M=
Substitute above values to the equation,
Or,
On solving this equation,
And, substitute above value to the equation,
Therefore, the short-run equilibrium level output is
Change in cyclical unemployment
And,
The unanticipated inflation is represented by the percentage change in price of the economy and will be calculated as follows:
Or,
Therefore, the economy will face
Introduction: Okun’s Law graph representation helps in defining relationship between unemployment and losses in the GDP of an economy. It explains the link between unemployment and output levels. Output is directly dependent on the amount of labor used in the production.This law intended to tell us how much of a country’s GDP may be lost when the unemployment is above its natural rate. Therefore, okun’s law explains the negative correlation between GDP growth and unemployment.
c.
To describe: The slope of the expectations-augmented
c.
Answer to Problem 3NP
The slope of the expectations-augmented Philips curve in this economy (h) is -
Explanation of Solution
Given data,
The equation for Philips curve of expectations-augmented is as follows:
Substitute the values given above in the equation,
Introduction: Okun’s Law graph representation helps in defining relationship between unemployment and losses in the GDP of an economy. It explains the link between unemployment and output levels. Output is directly dependent on the amount of labor used in the production. This law explains how much of a country’s GDP may be lost when the unemployment is above its natural rate. Therefore, okun’s law explains the negative correlation between GDP growth and unemployment.
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