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In: Economics

Suppose that the tradeoff between unemployment and inflation is determined by the Phillips curve: u=un –α(π−Eπ),...

Suppose that the tradeoff between unemployment and inflation is determined by the Phillips curve:
u=un –α(π−Eπ),
where u denotes the unemployment rate, un the natural rate, π the rate of inflation,
and Eπ the expected rate of inflation. In addition, suppose that the High Party always follows a policy of high money growth and the Low Party always follows a policy of low money growth. What “political business cycle” pattern of inflation and unemployment would you predict under the following conditions?
a. Every four years, one of the parties takes control based on a random flip of a coin. (Hint: What will expected inflation be prior to the election?)
b. The two parties take turns.
c. Do your answers above support the conclusion that monetary policy should be set by an independent central bank?

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Expert Solution

Rahul Sunny answered 2 years ago
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