2. Suppose we have an economy with Phillips curve π^² = π + (m + z) - au. Recall the price setting equation P = (1+m)W= (1+m)P^eF(u,z) = (1+m)P^e(1-au+z)
2. Suppose we have an economy with Phillips curve π^² = π + (m + z) - au. Recall the price setting equation P = (1+m)W= (1+m)P^eF(u,z) = (1+m)P^e(1-au+z)
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 10P
Related questions
Question
![2. Suppose we have an economy with
Phillips curve T^e = t + (m + z) – au. Recall
the price setting equation
P = (1+m)W = (1+m)P^eF(u,z) =
(1+m)P^e(1-au+z)
Suppose a = 1/5 , m = z = 1/20 .
a) Calculate the natural rate of
unemployment.
b) Now suppose that half of the working
population has its wages indexed - that is,
they have a constant real wage w. Derive
the new Phillips curve in this economy.
(Hint: first work out what the function F
looks like for workers with indexed wages,
then average this with the original F. You
should end up with a function that looks
like F *(u,z) = 1-a^*u+z^* - then plug the
values of a, z, m into the equation for the
Phillips curve.)
c) What's the new natural rate of
unemployment? Is it higher or lower than
before?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F94bf0466-b8b1-4bdf-b01b-7170cf4170e9%2Fc3b22d75-e0a9-4f1e-b269-438724340a3e%2Feh9vf8_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2. Suppose we have an economy with
Phillips curve T^e = t + (m + z) – au. Recall
the price setting equation
P = (1+m)W = (1+m)P^eF(u,z) =
(1+m)P^e(1-au+z)
Suppose a = 1/5 , m = z = 1/20 .
a) Calculate the natural rate of
unemployment.
b) Now suppose that half of the working
population has its wages indexed - that is,
they have a constant real wage w. Derive
the new Phillips curve in this economy.
(Hint: first work out what the function F
looks like for workers with indexed wages,
then average this with the original F. You
should end up with a function that looks
like F *(u,z) = 1-a^*u+z^* - then plug the
values of a, z, m into the equation for the
Phillips curve.)
c) What's the new natural rate of
unemployment? Is it higher or lower than
before?
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