Question

You are given the following information about the economy.

2010 2011 2012 2013

u 0.03 0.09 0.06 0.03

Y 2244 2343 1134 5678

The natural rate of unemployment is 0.04 and the Phillips curve relationship is ? = ?e - 2 (u - 0.04). Please show your work in answering the following questions:

(a) Using the following formula ( Y(overbar)- Y)/ Y(overbar)= 2(u - u(overbar)) estimate full-employment level of output (Y(overbar)) in each year?

(b) Calculate the growth rate of full-employment output each year.

(c) If expected inflation was 0.04 for all four years, what was the inflation rate each year?

Answer 1

Given Information

YEAR	Unemployment (u)	OUTPUT (Y)
2010	0.03	2244
2011	0.09	2343
2012	0.06	1134
2013	0.03	5678

(a)

  

  

For each year: , where t is the time period

YEAR	Unemployment (u)	OUTPUT (Y)	Overbar Y
2010	0.03	2244	2609.30
2011	0.09	2343	3166.22
2012	0.06	1134	1417.5
2013	0.03	5678	6602.33

(b) Growth rate = Y(overbar) (t-1) - Y(overbar)(t)/ Y(overbar)(t-1)

YEAR	Unemployment (u)	OUTPUT (Y)	Overbar Y	Growth Rate
2010	0.03	2244	2609.30	--
2011	0.09	2343	3166.22	0.21
2012	0.06	1134	1417.5	0.55
2013	0.03	5678	6602.33	-3.66

(c)

YEAR	Unemployment (u)	OUTPUT (Y)	Overbar Y	Growth Rate	Inflation Rate
2010	0.03	2244	2609.30	--	0.06
2011	0.09	2343	3166.22	0.21	-0.06
2012	0.06	1134	1417.5	0.55	0
2013	0.03	5678	6602.33	-3.66	0.06