1. Mutations of the Phillips curveSuppose that the Phillips curve is given by7, = x; + 0.1– 2u,a. What is the natural rate of unemployment?Assume z; = Or, and suppose that 0 is initially equal to 0. Suppose that the rateof unemployment is initially equal to the natural rate. In year 1, the authorities decideto bring the unemployment rate down to 3% and hold it there forever.b. Determine the rate of inflation in years 1,t+1,1+2, and 1+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.)Now suppose that in year 1+5, 0 increases from 0 to 1. Suppose that thegovernment is still determined to keep u at 3% forever.d. Why might 0 increase in this way?e. What will the inflation rate be in years 1+5, 1+6, and 1+7?f. Do you believe the answer given in (e)? Why or why not?

As per bartleby guidelines i only have to answer only first 3 questions

Suppose that the Phillips curve is given by 7, = n; +0.1- 2u, a. What is the natural rate of unemployment? Assume = On, and suppose that 0 is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year 1, the authorities decide to bring the unemployment rate down to 3% and hold it there forever. b. Determine the rate of inflation in years 1,1+1,1 +2, and 1+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.)

Suppose that the Phillips curve is given by 7, = n; +0.1- 2u, a. What is the natural rate of unemployment? Assume = On, and suppose that 0 is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year 1, the authorities decide to bring the unemployment rate down to 3% and hold it there forever. b. Determine the rate of inflation in years 1,1+1,1 +2, and 1+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.)

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 3QCMC

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1. An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.) A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph in part (b), label the point the economy experiences that year as point B.(Be sure to give numerical values.) Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing…