The relationship between inflation and unemployment in an economy is given by
? = ?e? 0.5(U? 4).?
a.What is the value of the natural rate of unemployment? b.If actual inflation is 1 percent and expected inflation is 2 percent, what is the unemployment rate? c.If expected inflation is 3 percent and the unemployment rate is 6 percent, what is the inflation rate?
What will be an ideal response?
| a. | Standard figure, just like text figure. |
| b. | The natural rate of unemployment is 4 percent, from the term in parentheses in the equation. |
| c. | ? = ?e? 0.5(U? 4) |
| 1% = 2% ? 0.5(U? 4), so 0.5(U? 4) = 1%, so U? 4 = 2%, so U = 6%. | |
| d. | ? = ?e? 0.5(U? 4) = 3% ? 0.5(6 ? 4) = 3% ? 1% = 2%. |
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