I. Suppose that the Phillips curve is given by 1 = n + 0.1 – 2u; a. What is the natural rate of unemployment? Assume 7 = On;-1, and suppose that 0 is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 4% and hold it there forever. b. Determine the rate of inflation in years t, t + 1, t + 2, and t + 5. c. Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.)

I. Suppose that the Phillips curve is given by 1 = n + 0.1 – 2u; a. What is the natural rate of unemployment? Assume 7 = On;-1, and suppose that 0 is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 4% and hold it there forever. b. Determine the rate of inflation in years t, t + 1, t + 2, and t + 5. c. Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.)

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter10: Aggregate Supply

Section: Chapter Questions

Problem 1.1P

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