Specific subject : Macroeconomics - Phillips Curve & Okun's Law Solve the following problem: The Phillips curve of an economy is defined by thefollowing relationship:T =T + 0,08 + 0,1m – 0,5u,In which m is the mark-up of prices over wages. Initially the value of the mark-up is 20%,but after an oil price shock, it rises to 40% (period t+1).(a). Find the Phillips curve and the natural rate of unemployment before the oil shock.How does the natural rate of unemployment change after the shock?(b). If expected inflation is given by Ttinflation was 2% and rose to 4% in period t, then what was the unemployment rate inthe period?(C). How does your answer in (b) change after the oil shock? What happens to inflationin periods t+1, t+2 and t+3, if the authority wanted to keep unemployment at the levelfound in period t?(d). How do your answers in (a) and (b) change if expected inflation is given byT = 0,5Ttt-1?(e) What happens if 20% of workers have their inflation expectations indexed to past= OTtt-1 with 0 = 1 ,where initially actualinflation?(f) Analyze the inflation adjustment if in period t+3, the authority would like to return tothe initial inflation of 2%. Okun's law is given by:Ut – Ut-1 = 0,2(gyt – 3%)Note: gyt is the real GDP growth rate in period t.

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Specific subject : Macroeconomics - Phillips Curve & Okun's Law

Solve the following problem: The Phillips curve of an economy is defined by the
following relationship:
T =
T + 0,08 + 0,1m – 0,5u,
In which m is the mark-up of prices over wages. Initially the value of the mark-up is 20%,
but after an oil price shock, it rises to 40% (period t+1).
(a). Find the Phillips curve and the natural rate of unemployment before the oil shock.
How does the natural rate of unemployment change after the shock?
(b). If expected inflation is given by Tt
inflation was 2% and rose to 4% in period t, then what was the unemployment rate in
the period?
(C). How does your answer in (b) change after the oil shock? What happens to inflation
in periods t+1, t+2 and t+3, if the authority wanted to keep unemployment at the level
found in period t?
(d). How do your answers in (a) and (b) change if expected inflation is given by
T = 0,5Ttt-1?
(e) What happens if 20% of workers have their inflation expectations indexed to past
= OTtt-1 with 0 = 1 ,where initially actual
inflation?
(f) Analyze the inflation adjustment if in period t+3, the authority would like to return to
the initial inflation of 2%. Okun's law is given by:
Ut – Ut-1 = 0,2(gyt – 3%)
Note: gyt is the real GDP growth rate in period t.

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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