I. Suppose that the Phillips curve is given by 1 = n + 0.1 – 2u; a. What is the natural rate of unemployment? Assume 7 = On;-1, and suppose that 0 is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 4% and hold it there forever. b. Determine the rate of inflation in years t, t + 1, t + 2, and t + 5. c. Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.) Now suppose that in year t + 5, 0 increases from 0 to 1. Suppose that the government is still determined to keep u at 4% forever.

I. Suppose that the Phillips curve is given by 1 = n + 0.1 – 2u; a. What is the natural rate of unemployment? Assume 7 = On;-1, and suppose that 0 is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 4% and hold it there forever. b. Determine the rate of inflation in years t, t + 1, t + 2, and t + 5. c. Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.) Now suppose that in year t + 5, 0 increases from 0 to 1. Suppose that the government is still determined to keep u at 4% forever.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

d, e, f

I. Suppose that the Phillips curve is given by
1 = n + 0.1 – 2u;
a. What is the natural rate of unemployment?
Assume 7 = On;-1, and suppose that 0 is initially equal to 0. Suppose that the rate of
unemployment is initially equal to the natural rate. In year t, the authorities decide to bring
the unemployment rate down to 4% and hold it there forever.
b. Determine the rate of inflation in years t, t + 1, t + 2, and t + 5.
c. Do you believe the answer given in (b)? Why or why not?
(Hint: Think about how people are likely to form expectations of inflation.)
Now suppose that in year t + 5, 0 increases from 0 to 1. Suppose that the government is still
determined to keep u at 4% forever.
d. Why might 0 increase in this way?
e. What will the inflation rate be in years t + 5, t + 6, and t + 7?
f. Do you believe the answer given in (e)? Why or why not?

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how about questions d and e?
blanks C and D?