Answered: 5. Consider the Phillips curve πt =…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. Consider the Phillips curve πt = πt-1 – 0.5(ut – 0.01).

a) What is the natural rate of unemployment? Graph the short-run and long-run relationships between inflation and unemployment?

b) How much unemployment is necessary to reduce inflation by 3%? Compute the sacrifice ratio. Show your work.

c) Do flexible exchange rates permit a country to pick its own unemployment-inflation trade-off target?

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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