Suppose that 60% of the workers have indexed labour contracts. The Phillips curve is given by л₁ = π +0.12 - 2u. Expected inflation is given by л = (1 − 0)ñ + Оπ₁-1 where 0 is assumed to be zero. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, π is assumed to be 2% and the authorities decide to bring the unemployment rate down to 3% and hold it there forever. What is the inflation rate at t + 3?
Suppose that 60% of the workers have indexed labour contracts. The Phillips curve is given by л₁ = π +0.12 - 2u. Expected inflation is given by л = (1 − 0)ñ + Оπ₁-1 where 0 is assumed to be zero. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, π is assumed to be 2% and the authorities decide to bring the unemployment rate down to 3% and hold it there forever. What is the inflation rate at t + 3?
Chapter1: Making Economics Decisions
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