Suppose that an economy has the Phillips curve π = π−1 − 0.5( u − 0.06). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relationships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio. d. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.

Suppose that an economy has the Phillips curve π = π−1 − 0.5( u − 0.06). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relationships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio. d. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: The Short-run Trade-off Between Inflation And Unemployment

Section17.1: The Phillips Curve

Problem 1QQ

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Suppose that an economy has the Phillips curve p = p−1 – 0.5(u − 0.06). A. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio. B. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.
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