1. The statement that the natural rate of unemployment is independent of the conduct of monetary policy is false. The natural rate of unemployment, also known as the non-accelerating inflation rate of unemployment (NAIRU), is determined by structural factors such as labor market frictions and the level of potential output. However, monetary policy can indirectly influence the natural rate of unemployment through its impact on inflation and economic activity.
When monetary policy is expansionary, with low interest rates and increased money supply, it can stimulate aggregate demand and reduce unemployment below its natural rate temporarily. However, sustained expansionary monetary policy can lead to higher inflation, which in turn can raise inflation expectations and eventually increase the natural rate of unemployment. On the other hand, contractionary monetary policy, with higher interest rates and reduced money supply, can help control inflation but may also increase unemployment in the short run.
Therefore, while monetary policy can influence the short-term fluctuations in unemployment around the natural rate, it cannot permanently alter the natural rate itself.
2. Given the Phillips curve equation: pi_t = pi_{t-1} - 0.5(U_t - 0.06), where pi is the inflation rate and U is the unemployment rate, we are told that the inflation rate at time t-1 is 0 and the unemployment rate at time t is at the natural level. To find the inflation rate at time t, we substitute pi_{t-1} = 0 and U_t = natural rate into the equation:
pi_t = 0 - 0.5(natural rate - 0.06)
pi_t = -0.5(natural rate - 0.06)
So, the inflation rate at time t is -0.5 times the difference between the natural rate and 0.06.
3. To calculate the inflation rate at time t+1, t+2, and t+3, given the government's target of reducing the unemployment rate to 2% in period t+1 and keeping it at that level for three periods, we can use the Phillips curve equation:
For t+1:
pi_{t+1} = pi_t - 0.5(U_{t+1} - 0.06)
pi_{t+1} = -0.5(natural rate - 0.06) - 0.5(0.02 - 0.06)
For t+2:
pi_{t+2} = pi_{t+1} - 0.5(U_{t+2} - 0.06)
pi_{t+2} = -0.5(natural rate - 0.06) - 0.5(0.02 - 0.06) - 0.5(0.02 - 0.06)
For t+3:
pi_{t+3} = pi_{t+2} - 0.5(U_{t+3} - 0.06)
pi_{t+3} = -0.5(natural rate - 0.06) - 0.5(0.02 - 0.06) - 0.5(0.02 - 0.06) - 0.5(0.02 - 0.06)
By substituting the given values, we can find the inflation rate at each time period.
"The natural rate of unemployment is independent of the conduct of monetary policy" Evaluate this statement (5 Marks)
Suppose that the Phillips curve in the economy is givenven by (for any time t) pi t = pi t - 1 -0.5(U t -0.06)
Suppose that the economy starts with an inflation rate of 0 at time t - 1 Moreover at time t the unemployment rate is at the natural level. What is the inflation rate in the economy at time t? (5
Marks)
Suppose that the government wants to decrease the unemployment rate to 2% (= 0.02 ) in period t + 1. The government wants to keep that unemployment rate for three periods, t + 1 , t + 2 and t + 3 . Using the Phillips curve defined above calculate the inflation rate at time t + 1 , t + 2 and
t + 3 . (6 Marks)
1 answer
1 answer