p21 2 0.5(u 2 5). "hat is the natural rate of unemployment? raph the short-run and long-run relation-

ENGR.ECONOMIC ANALYSIS
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5) Suppose that an economy has the Phillips curve
p 5 p21 2 0.5(u 2 5).
a. What is the natural rate of unemployment?
b. Graph the short-run and long-run relation-
ships between inflation and unemployment.
c. How much cyclical unemployment is
necessary to reduce inflation by 4 percentage
points? Using Okun's law, compute the
sacrifice ratio.
Transcribed Image Text:5) Suppose that an economy has the Phillips curve p 5 p21 2 0.5(u 2 5). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relation- ships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 4 percentage points? Using Okun's law, compute the sacrifice ratio.
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