Consider a version of the Phillips curve where a proportion of wages, 1 >> 0, are nowindexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one withthe actual price level. The remaining proportion of wages, (1-2), are set on the basis ofexpected inflation:nt λnt (1) et+ (m+z)-aut(2)a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate suchthat t=t-1). Is the natural rate of unemployment different as a result of wage indexation?b. Re-write the Phillips curve in terms of the difference between чt and un using thevalue for un you calculated in (a). How does wage indexation impact the way changes ininflation respond to deviations of the unemployment rate from the natural rate? What is theintuition for this result?

The Phillips curve establishes the relationship between inflation in time period t and unemployment…

Consider a version of the Phillips curve where a proportion of wages, 1>>0, are now indexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one with the actual price level. The remaining proportion of wages, (1-2), are set on the basis of expected inflation: nt=λnt + (1) et+ (m+z)-aut (2) a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate such that at nt-1). Is the natural rate of unemployment different as a result of wage indexation? b. Re-write the Phillips curve in terms of the difference between чt and un using the value for un you calculated in (a). How does wage indexation impact the way changes in inflation respond to deviations of the unemployment rate from the natural rate? What is the intuition for this result?

Consider a version of the Phillips curve where a proportion of wages, 1>>0, are now indexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one with the actual price level. The remaining proportion of wages, (1-2), are set on the basis of expected inflation: nt=λnt + (1) et+ (m+z)-aut (2) a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate such that at nt-1). Is the natural rate of unemployment different as a result of wage indexation? b. Re-write the Phillips curve in terms of the difference between чt and un using the value for un you calculated in (a). How does wage indexation impact the way changes in inflation respond to deviations of the unemployment rate from the natural rate? What is the intuition for this result?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider an economy for which wage and price inflation are initially 3% under a zero output gap. Calculate price inflation by the end of the current period under a new output gap of 6%. (Hint: you need to use the Phillips curve equation)
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