Take the Phillips curve from the previous question and illustrate the corresponding labor market Phillips curve where the initial unemployment rate was 7 ¹/₂% and the final unemployment rate is 2 ¹/₂% . What is the equilibrium unemployment rate in the economy?

Data from in previous question

You’re a junior consultant at a management consulting company and your team has been hired to help guide a struggling regional retailer. You do some research and find that the output gap is currently zero, and inflation is 4%. In an effort to boost output before the next election, the government announces an unexpected stimulus package that you expect will increase next year’s output to be 5% above potential.

a. Use the Phillips curve to estimate unexpected inflation after the stimulus.

b. What is your forecast for actual inflation after the stimulus?

c. How do you advise the retailer when they ask you how they should change prices next year, given that the stimulus will have boosted output?

Transcribed Image Text:

Unexpected inflation 2% 1% 0% -1% -2% -10% -5% 0 5% 10% Phillips curve Output gap