Suppose an economy is subject to the following Phillips curve: = -0.6(u-0.05) Where E =...

 

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Suppose an economy is subject to the following Phillips curve: π = -0.6(u-0.05) Where Eπ = .04 is the current inflation expectation. a) Draw the figure of short-run and long-run relationships between inflation and unemployment of the above Philips curve. (3 points) b) Suppose the central bank reduces the inflation rate by 1 percentage point. How does that affect the unemployment rate in the short run and in the long run, in the following two cases: b1). Households fully anticipate the reduction of inflation (3 points) b2). Households don't anticipate the reduction of inflation. (3 points) c) Now, assume that the Philips Curve is equal to π = π-1-0.6(u-0.05), where -1 = 0.04 is the inflation rate of the last year. Considering the Lucas critique, should policymakers use this Philips Curve for making policy? Why? (3 points) Suppose an economy is subject to the following Phillips curve: π = -0.6(u-0.05) Where Eπ = .04 is the current inflation expectation. a) Draw the figure of short-run and long-run relationships between inflation and unemployment of the above Philips curve. (3 points) b) Suppose the central bank reduces the inflation rate by 1 percentage point. How does that affect the unemployment rate in the short run and in the long run, in the following two cases: b1). Households fully anticipate the reduction of inflation (3 points) b2). Households don't anticipate the reduction of inflation. (3 points) c) Now, assume that the Philips Curve is equal to π = π-1-0.6(u-0.05), where -1 = 0.04 is the inflation rate of the last year. Considering the Lucas critique, should policymakers use this Philips Curve for making policy? Why? (3 points)

Answer rating: 100% (QA)

a The graph shows the shortrun Phillips curve as a downward sloping curve indicating an inverse relationship between inflation and unemployment u The ... View the full answer