Calculate the natural rate of unemployment

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Reference no: EM132207500

Question: Suppose that the Phillips curve is given by

πt = πet + 0.2 - 2ut.

a) Calculate the natural rate of unemployment for this example. Now assume that πet = θπt-1 and suppose θ is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 6% and hold it there forever.

b) Determine the rate of inflation in years t, t+1, t+2, t+3

c) Do you believe the answer you get in (b)?Why or why not?

Now suppose in year t + 3, θ increases from 0 to 1.Suppose that the government is still determined to keep u at 6% forever.

d) why might 0 increase in this way.

e) Determine inflation rate in years t+4, t+5, t+6

Reference no: EM132207500

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