Answer the questions below.
a.Suppose the equation describing the Phillips curve in an economy is ? = ?e? 2(U?UN). If the expected inflation rate is 2 percent and the natural rate of unemployment is 5%, draw a diagram showing the long-run Phillips curve and the current short-run Phillips curve. b.Calculate the unemployment rate corresponding to each of the following points. Actual
inflation
Point A:0%
Point B:2%
Point C:4%
Point D:8%
c.If the natural rate of unemployment were to fall to 4 percent, but the expected inflation rate remained unchanged at 2 percent, what would be the unemployment rate corresponding to each of the following points on the short-run Phillips curve? Actual
inflation
Point E:0%
Point F:2%
Point G:4%
Point H:8%
What will be an ideal response?
| a. | Standard figure, just like text figure. |
| b. | Point A: ? = ?e? 2(U? 5) |
| 0 = 2 ? 2(U? 5), so 2(U? 5) = 2, so U? 5 = 1, so U = 6%. | |
| Point B: 2 = 2 ? 2(U? 5), so 2(U? 5) = 0, so U? 5 = 0, so U = 5%. | |
| Point C: 4 = 2 ? 2(U? 5), so 2(U? 5) = ?2, so U? 5 = ?1, so U = 4%. | |
| Point D: 8 = 2 ? 2(U? 5), so 2(U? 5) = ?6, so U? 5 = ?3, so U = 2%. | |
| c. | Point E: ? = ?e? 2(U? 4) |
| 0 = 2 ? 2(U? 4), so 2(U? 4) = 2, so U? 4 = 1, so U = 5%. | |
| Point F: 2 = 2 ? 2(U? 4), so 2(U? 4) = 0, so U? 4 = 0, so U = 4%. | |
| Point G: 4 = 2 ? 2(U? 4), so 2(U? 4) = ?2, so U? 4 = ?1, so U = 3%. | |
| Point H: 8 = 2 ? 2(U? 4), so 2(U? 4) = ?6, so U? 4 = ?3, so U = 1%. |
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