Periods of price deflation, such as the Great Depression, are characterized by
A) low nominal rates but high real rates of interest.
B) low nominal and real interest rates.
C) real rates of interest lower than the nominal rate of interest.
D) high nominal and real rates of interest.
A
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Consider an economy in long-run equilibrium with an inflation rate (?) of 0.08 per year and a natural unemployment rate of 0.05
. Suppose Okun's law holds and a one percentage point increase in the unemployment rate reduces real output by 2% of full-employment output. The expectations-augmented Phillips curve is given by ? = ?e - 2.5 (u - 0.05). Consider a two-year disinflation. In the first year, ? = 0.06 and ?e = 0.08. In the second year, ? = 0.04 and ?e = 0.05. (a) In the first year, what is the value of the unemployment rate? (b) In the first year, by what percentage does output fall short of full-employment output? (c) In the second year, what is the value of the unemployment rate? (d) In the second year, by what percentage does output fall short of full-employment output? (e) What is the sacrifice ratio for this disinflation?
Leakages in the circular flow model are
A) caused by people not acting rational. B) possible when unemployment exists. C) reflected in the vertical long-run aggregate supply curve. D) caused by people saving instead of spending.