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# Aggregate Supply – Work It Out An economy has the given equation for the

Question: Aggregate Supply – Work It Out An economy has the given equation for the Phillips curve: T= En -0.75(u – 5) People form expectations of inflation by taking a weighted average of the previous two years of inflation: Eπ = 0.6-1 0.47-2 Okun’s law for this economy is: Y-Y_1 Y_1 The economy begins at its natural rate of unemployment with a stable inflation rateShow transcribed image textAn economy has the following equation for the Phillips curve: π = Eπ − 0.75(u − 5) People form expectations of inflation by taking a weighted average of the previous two years of inflation: Eπ = 0.6π−1 0.4π−2 Okun’s law for this economy is: (Y − Y−…View the full answerTranscribed image text: Aggregate Supply – Work It Out An economy has the given equation for the Phillips curve: T= En -0.75(u – 5) People form expectations of inflation by taking a weighted average of the previous two years of inflation: Eπ = 0.6-1 0.47-2 Okun’s law for this economy is: Y-Y_1 Y_1 The economy begins at its natural rate of unemployment with a stable inflation rate of 8 percent. = 2.0 – 2.5(u-u-1) a. Calculate the natural rate of unemployment for this economy. natural unemployment rate: b. Graph the short-run tradeoff between inflation and unemployment that this economy faces by dragging and dropping the endpoints in the accompanying graph to the correct location. Then, label the point where the economy begins as point A. c. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 2 percentage points above its natural rate. On your graph in part (a), label the point the economy experiences that year as point B. 12 11 10 9 8 7 M 6 5 4 3 2 1 0 MY 10.0 9.0 1 3 5 6 SRPC B A 9.0 10.0 9 10 e. Comparing the equilibrium before the recession with the new long-run (period six) equilibrium, how much does inflation change? How many percentage points of output are lost during the transition? What is this economy’s sacrifice ratio? Inflation decreases by The sacrifice ratio equals percentage points. percentage points of output are lost.

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