Question #68108

Assume that the Phillips curve is as follow: πt=πt^E + 0.2-4ut
πt = current rate of inflation
πt^E = expected rate of inflation
>>> Calculate the natural rate of unemployment rate (Un)
>>> Now, assume that inflation has been lower than expected by 2 percent points. Calculate the current unemployment rate and the natural unemployment rate.

Expert's answer

According to the formula of Philips curve it should be represented in the following way: Pt=Pte-a(Ut –Ut*)+ b, where Pt is the inflation level for period t, Pte is expected level of inflation rate at period t, Ut represents the unemployment rate for period t, Ut* is natural unemployment rate, b is the constant shows some shocks and a is parameter that shows how will change Pt according to the changes in the gap of unemployment and natural unemployment rates.

Your equation is represented in this way: Pt=Pte-4Ut+0.2.

A) Comparing these two Philips curves I came to the conclusion that in your economy natural rate of unemployment is absent, it just means Ut*=0.

B) Form your data we can resume that Pte-Pt is equal to 2 %, so putting it into the equation you have represented and doing some mathematical operations we will get that Ut=0.6, which means that in your economy the unemployment rate at time t is equal to 0.6% and again Ut*=0%.

Your equation is represented in this way: Pt=Pte-4Ut+0.2.

A) Comparing these two Philips curves I came to the conclusion that in your economy natural rate of unemployment is absent, it just means Ut*=0.

B) Form your data we can resume that Pte-Pt is equal to 2 %, so putting it into the equation you have represented and doing some mathematical operations we will get that Ut=0.6, which means that in your economy the unemployment rate at time t is equal to 0.6% and again Ut*=0%.

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