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In which of the scenarios listed here will the unemployment rate fall below the natural rate of unemployment? There could be more than one answer.

A. Inflation is steady at 3% for two years but then decreases to 1% for a year.

B. Inflation is steady at 5% for several years.

C. Inflation is steady at 2% for three years, and the Fed unexpectedly increases the money supply, causing inflation to increase to 3% the following year.

D. Inflation is steady at 1% for three years but then increases to 4% for one year.

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

(1) What is the effect of wage indexation on the relation between inflation and unemployment?

Ā  Ā 

(a) As indexation increases, inflation becomes less sensitive to the difference between the unemployment rate and the natural rate.

Ā 
Ā  Ā 

(b) No effect

Ā 
Ā  Ā 

(c) As indexation increases, inflation becomes more sensitive to the difference between the unemployment rate and the natural rate.

Ā 
Ā  Ā 

(d) As indexation increases, inflation becomes less sensitive to the natural rate.

Ā 

Ā 

(2) When inflation has been persistent, as was the case in the United States during the 1970s, low unemployment rates will likely be associated with:

Ā  Ā 

(a) low natural rates of unemployment.
Ā  Ā 

(b) high but stable rates of inflation.
Ā  Ā 

(c) high natural rates of unemployment.
Ā  Ā 

(d) increases in the inflation rate.

(3) For this question, assume that the Phillips curve equation is represented by the following equation:Ā 

Ā . A reduction in the unemployment rate will cause:

Ā  Ā 

(a) a reduction in the markup over labor costs (i.e., a reduction in m).
Ā  Ā 

(b) an increase in the markup over labor costs.
Ā  Ā 

(c) an increase in the inflation rate over time.
Ā  Ā 

(d) a decrease in the inflation rate over time.

Please read the following article from MoneyNews.com: http://www.moneynews.com/StreetTalk/Bullard-Unemployment-Inflation-Fed/2014/07/09/id/581767/.

The focus of the article is a predicted rise in the rate of inflation, driven partially by a drop in the unemployment rate. How does this relate to our studies of inflation and unemployment, especially the Phillips Curve?

Do you see examples in your own life that support the author's holding? Do you agree with the premise of the article? Why or why not?

Article:

Bullard: Falling Unemployment Will Push Inflation Above Fed Target.

< >Share0

Federal Reserve Bank of St. Louis President James Bullard said a surprisingly fast drop in unemployment will fuel inflation, bolstering his case for an interest-rate increase early next year.

I think we are going to overshoot here on inflation, Bullard said Wednesday in a telephone interview from St. Louis. He predicted an inflation rate of 2.4 percent at the end of 2015, well above the Feds 2 percent target.

That is a break from where most of the committee seems to be, which is a very slow convergence of inflation to target, he said in a reference to the policy-making Federal Open Market Committee.

A drop in the jobless rate to 6.1 percent in June, the lowest level in almost six years, increases pressure on the Fed to raise the main interest rate sooner than most officials have estimated, Bullard said.

The St. Louis Fed chief, who calls himself the North Pole of inflation hawks, estimates full employment at about 6 percent. A lower level may stoke wage and price pressures, he said.

When unemployment goes into the five range, that is going to below the natural rate, or the level at which inflation is neither speeding up nor slowing down, Bullard said.

Inflation has been unusually low in 2013 and the first part of 2014 because of temporary circumstances such as European economic weakness.

Those special factors are wearing off, and the economy is on the upswing, Bullard said. Those factors will send the inflation rate above the target in 2015.

Suppose that natural real output in the country of Eudemonia grows at a steady rate of 3 percent per year. In the past, velocity has been approximately constant, and the Eudemonian central bank has maintained a target rate of growth of 4 percent per year for the money stock. What would be the resulting rate of inflation? Now suppose that the introduction of Internet banking allows people to make transactions online without holding large amounts of currency or bank balances. As Internet banking spreads, velocity begins to increase at a rate of 3 percent per year. What will happen to the rate of inflation if money growth is unchanged? How could the central bank react to the change in velocity if it pursued an NGDP target instead of a money stock target?

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