Assignment

Part 1

1. Using pictures, explain the difference between demand pull and cost push inflation.

2. Draw a traditional Phillips curve. What does it imply is the usual relationship between inflation and unemployment? What monetary and fiscal policies would lower unemployment while increasing inflation?

3. What is meant by stagflation? Show stagflation in a Phillips curve diagram. What US decade showed stagflation?

4. Explain the difference between the short run and the long run Phillips curve. What does short run mean here? What does long run mean here?

5. Define each of the following types of unemployment: frictional, structural, natural, cyclical. Give an example of each one.

Part 2

1. What is meant by the natural rate hypothesis? What does it imply about monetary policy in the short run? In the long run?

2. Suppose an economy is experiencing high inflation. How might a policy of "inflation targeting" help the Central Bank permanently reduce inflation?

3. What is the "dual mandate" of the Fed? Be specific as to how the Fed defines each arm of its dual mandate.

4. What is the rules versus discretion debate? Relate this to "the fool in the shower" and "time inconsistency"

Part 3

1. Why don't we define economic growth as the percentage increase in nominal GDP?

2. Suppose Nominal GDP rises 6%, inflation is 2% and population growth is 1%. What is the rate of increase of real GDP? Real GDP per capita?

3. What is the rule of 70? Explain how it is useful to compare growth rates across two countries.

4. Using FRED, find real GDP for the year of your birth and for 2016. By what percent did real GDP increase in your lifetime? What was the average annual rate of growth over your lifetime?

Part 4

1. In a Solow growth model suppose the production function is y = square root of k, where y = Y/L and k = K/L. If the economy saves 15% of its income and 5% is the rate of capital depreciation, find the steady state living standard. If the saving rate increases to 30%, what happens to the living standard?

2. Redo problem number 1, but assume that population and the labor force each grow 2.5% per year.

3. In the US, real GDP growth over the long run has slowed from about 3% to 2% per year. How would the Solow model explain this?