2. Suppose we have an economy withPhillips curve T^e = t + (m + z) – au. Recallthe price setting equationP = (1+m)W = (1+m)P^eF(u,z) =(1+m)P^e(1-au+z)Suppose a = 1/5 , m = z = 1/20 .a) Calculate the natural rate ofunemployment.b) Now suppose that half of the workingpopulation has its wages indexed - that is,they have a constant real wage w. Derivethe new Phillips curve in this economy.(Hint: first work out what the function Flooks like for workers with indexed wages,then average this with the original F. Youshould end up with a function that lookslike F *(u,z) = 1-a^*u+z^* - then plug thevalues of a, z, m into the equation for thePhillips curve.)c) What's the new natural rate ofunemployment? Is it higher or lower thanbefore?

The Phillips Curve is a graphical representation and economic concept that shows the relationship…

Answered: 2. Suppose we have an economy with…

2. Suppose we have an economy with Phillips curve π^² = π + (m + z) - au. Recall the price setting equation P = (1+m)W= (1+m)P^eF(u,z) = (1+m)P^e(1-au+z)

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter24: Measuring The Cost Of Living

Section: Chapter Questions

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Question

2. Suppose we have an economy with
Phillips curve T^e = t + (m + z) – au. Recall
the price setting equation
P = (1+m)W = (1+m)P^eF(u,z) =
(1+m)P^e(1-au+z)
Suppose a = 1/5 , m = z = 1/20 .
a) Calculate the natural rate of
unemployment.
b) Now suppose that half of the working
population has its wages indexed - that is,
they have a constant real wage w. Derive
the new Phillips curve in this economy.
(Hint: first work out what the function F
looks like for workers with indexed wages,
then average this with the original F. You
should end up with a function that looks
like F *(u,z) = 1-a^*u+z^* - then plug the
values of a, z, m into the equation for the
Phillips curve.)
c) What's the new natural rate of
unemployment? Is it higher or lower than
before?

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