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Suppose the economy starts at 5% unemployment

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Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation;remains at 3%. Which one of the following points could the economy move to in the short run if;the Federal Reserve pursues a more expansionary monetary policy?;2);a) If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points;and unemployment rises 2 percentage points for one year, what is the sacrifice ratio?;b) If the Fed reduces inflation 1 percentage point and this makes output fall 2 percentage points;and unemployment rises 3 percentage points for six months, what is the sacrifice ratio?;c) If a central bank reduced inflation by 2 percentage points and that made output fall by 3;percentage points for 2 years and the unemployment rate rises from 3 percent to 5 percent for 2;years, what is the sacrifice ratio?;d) If the sacrifice ratio is 2, reducing the inflation rate from 10 percent to 6 percent, what would;the percentage of annual output require to sacrifice?

 

Paper#30581 | Written in 18-Jul-2015

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