Economy has expected inflation rate

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a. Suppose an economy has an expected inflation rate of 6% and a natural unemployment rate of 7%. If the unemployment rate falls by 1%, then the inflation rate rises by 4%. Draw the Phillips Curve for this economy, being sure to label the intercepts of the vertical and horizontal axes.

b. Okun’s Law says that a 1% fall in unemployment is equivalent to a 2% rise in GDP and vice versa. How much would GDP have to change from its natural level to get the inflation rate down to 3%?

Reference no: EM131094621

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