Question

In: Economics

Suppose that the Phillips curve is given by:πt-πt-1=m+z-αut. In addition, you are told the following:

Suppose that the Phillips curve is given by:πt-πt-1=m+z-αut. In addition, you are told the following:

If the unemployment rate is 0.07, the inflation rate will rise

If the unemployment rate is 0.10, the inflation rate will fall

Based on this information, we can conclude that the natural rate of unemployment is

A) lower than 0.07

B) equals 0.07

C) between 0.07 and 0.10

D) higher than 0.10

Expert Solution

In the short-run, there exists a trade-off between inflation and unemployment. Any policy meant to decrease unemployment, will most likely increase inflation. This is because the policy will be expansionary in nature.

Conversely, any policy which may raise unemployment, will decrease inflation. This is because the policy will be contractionary in nature.

The natural rate of unemployment will be associated with a stable or non-accelerating, rate of inflation.

Thus, in the given scenario, we can conclude that the natural rate of unemployment is:

---

Correct answer:

C) between 0.07 and 0.10

Between these two values, inflation becomes stable - i.e., it neither rises nor falls. This stable inflation rate will be associated with the natural rate of unemployment

Rahul Sunny answered 2 years ago

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