Which country will have the higher sacrifice ratio

Assignment Help Business Economics

Reference no: EM13981947

The firms and workers in Bayernland form expectations rationally. The firms and workers in Realland form expectations adaptively. Their otherwise identical economies are initially in equilibrium at the natural level of output with 6 percent inflation. The central banks of both Bayernland and Realland make credible commitments to reduce the growth rate of money until they achieve 3 percent inflation.

a) Compare and contrast the adjustment process to the new equilibrium at the lower rate of inflation in both countries.

b) Which country will have the higher sacrifice ratio?

c) Using Okun's Law and the assumption that the sacrifice ratio in Realland is four, what is the "cost" of bringing down inflation in Realland in terms of GDP and unemployment? Provide two answers, one for the case where the drop in inflation is achieved over one year, and the other where the process is allowed to take five years. Which case strikes you as more realistic?

Reference no: EM13981947

Questions Cloud

Suppose that the inverse market demand for pumpkins : Suppose that the inverse market demand for pumpkins is given by P=$10-0.05Q. Pumpkins can be grown by anybody at a constant marginal cost of $1. If there are lots of pumpkin growers in town so that the pumpkin industry is competitive, how many pumpki..

Deficit nation in a fixed exchange rate system can improve : A deficit nation in a fixed exchange rate system can improve its balance of payments by increasing. One method for a deficit country to correct the situation under a fixed exchange rate system is to. The saving rate in the United States fell to nearl..

Describe the main differences between the sticky-price-model : Describe the main differences between the Sticky-Price-Model and the Incomplete-Information-Model. Focus specifically on. The assumption regarding the market structure for the firms. The assumption regarding the level of information of the actors in ..

Which country will have the higher sacrifice ratio : The firms and workers in Bayernland form expectations rationally. The firms and workers in Realland form expectations adaptively. Their otherwise identical economies are initially in equilibrium at the natural level of output with 6 percent inflation..

Interest rate would the two choices be equivalent : Progressive Printing, Inc. needs a new high-speed printer to replace their existing out-of-date unit. They decided to buy a used IntegraColor KBA UV 81-Inch Press, a very high-end lithograph machine. At what monthly bank interest rate would the two c..

Combined federal and state taxes on this extra income : A small engineering consulting company has taxable income that places it in the 34% federal income tax bracket and the 10% state incremental tax rate. The company can earn an extra $33,000 on a small job at the end of the tax year. What will be the c..

Offers protection against theft or loss of credit cards : An insurance company offers protection against theft or loss of credit cards. The insurance company will insure a credit card holder against all costs incurred for any credit cards (regardless of the number of cards) lost or stolen during the next th..

Mixed market of cars with both lemons and plums : What are the three questions that must be answered in order to determine the consumers' willingness to pay in a mixed market of cars with both Lemons and plums?

User Account

All Pages