Okun's Law and the Phillips Curve

Okun's Law and the Phillips Curve

1. 1. According to Okun's law with k ≈ 0.5, if the output gap widens from 0% to +2%, what should happen to unemployment relative to the natural rate?

   Unemployment rises by 1 percentage pointUnemployment falls by 1 percentage pointUnemployment remains unchangedUnemployment falls by 2 percentage points

2. 2. If the expectations-augmented Phillips curve is π = π^e - β(u - u_n) + ε with β = 0.5, and unemployment falls 1 percentage point below the natural rate while inflation expectations are anchored at 2%, by how many percentage points would inflation exceed expectations (holding ε = 0)?

   percentage points

3. 3. In the chain of Okun's law and Phillips curve (π = π^e + βk(Y - Y_n)/Y_n + ε), what does the product βk represent?

   The natural rate of unemploymentThe inverse of the sacrifice ratio: inflation increase per percentage point of output over-heatingThe lag between output shocks and unemployment changesThe speed at which the Fed raises interest rates

4. 4. During the 2020-2022 US macro path, which of the following occurred according to the lesson? (Select all that apply.)

   The output gap fell to -3% during the 2020 trough, causing unemployment to spikeFiscal stimulus and recovery pushed the output gap to +2% by mid-2022, pulling unemployment to about 3.5%Inflation stayed anchored to expectations throughout 2021 because unemployment remained at the natural rateAggressive Fed tightening through 2023 closed the output gap back toward zero and allowed inflation to ease

5. 5. The expectations-augmented Phillips curve shows that inflation depends on three factors. Which of the following is NOT one of them according to the lesson?

   Expected inflation (π^e)The unemployment gap relative to the natural rate (u - u_n)Supply shocks and measurement error (ε)The growth rate of the money supply