The diagram opposite shows two short-run Phillips curves (PC0 and PC1). PC0 corresponds to a situation in which workers expect no inflation. (a) What is the natural rate of unemployment? (b) What is the expected rate of inflation if the Phillips curve is PC1? Suppose that the economy begins in long-run equilibrium with zero inflation and that the authorities adopt a policy of constant monetary growth because they wish to reduce unemployment below its existing level. (c) Identify the short-run
The diagram opposite shows two short-run Phillips curves (PC0 and PC1). PC0 corresponds to a situation in which workers expect no inflation.
(a) What is the natural rate of
(b) What is the expected rate of inflation if the Phillips curve is PC1?
Suppose that the economy begins in long-run equilibrium with zero inflation and that the authorities adopt a policy of constant monetary growth because they wish to reduce unemployment below its existing level.
(c) Identify the short-run effect on unemployment and inflation.
Unemployment........................................................................................................................
Inflation...................................................................................................................................
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