The relationship between inflation and unemployment is given by π = π$ − 3(u − 0.06)....

The relationship between inflation and unemployment is given by π = π$ − 3(u − 0.06).

(a) What is the value of the natural rate of unemployment?

(b) If actual inflation is 0.02 and expected inflation is 0.05, what is the unemployment rate?

(c) If an aggregate demand shock (resulting from increased exports of goods) raises the inflation rate to 0.08 (the natural rate of unemployment and the expected inflation rate are not affected). What is the numerical value of the unemployment rate?

(d) Graph the long-run and short-run Phillips curves for (a), (b) and (c).

(e) In order to flight high inflation rate, what strategies can be used by the government? What are

the advantage and disadvantage of these strategies?

(f) Describe the principal costs of unemployment. Suppose Okun's law holds and a one percentage point increase in the unemployment rate reduces real output by 2% of full- employment output. Consider a gradualism disinflation strategy, if π = 0.05 and π$= 0.08, what percentage does output fall short of full-employment output?

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Rahul Sunny answered 2 years ago

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