suppose inflation expectations are anchored at .02, and the natural rate of unemployment is .05 and...

suppose inflation expectations are anchored at .02, and the natural rate of unemployment is .05 and a=.02. what is the inflation rate at t if unemployment is set to .03 and holding it there for t+1,t=2, and t+3

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Expert Solution

The Phillip's curve is represented as . We have , , and . The equation would be hence . Also, note that .

For t=1, we have or or or .

For t=2, since , we have or or or .

For t=3, since , we have or or or .

As can be seen, if unemployment rate is forced to be hold below the natural rate, then inflation would increase.

Rahul Sunny answered 2 months ago

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