Author Question: Assume expectations of prices are correct but expectations of productivity adjust slowly. Use the ... (Read 142 times)

roselinechinyere27m · **on:** Jun 30, 2018

Assume expectations of prices are correct but expectations of productivity adjust slowly. Use the PS/WS relations, graphically illustrate and explain the effects of a decrease in productivity growth on the natural rate of unemployment.

What will be an ideal response?

Question 2

Use the market for central bank money to answer this question. Graphically illustrate and explain what effect a Federal Reserve purchase of bonds will have on this market and on the equilibrium interest rate.

What will be an ideal response?

huda · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The PS relation shifts up by a factor A. The WS relation shifts up by a factor Ae. If Ae>A, the PS curve shifts up by less than the WS relation shifts up, leading to an increase in the natural rate of unemployment for some time.

Answer to Question 2

A Fed purchase of bonds will cause an increase in the supply of central bank money. To restore equilibrium in this market, the interest rate will have to fall. As it does, the quantity demanded for central bank money will rise and, therefore, restore equilibrium.