Question: 1.Consider the Phillips curve t = t-1 - 0.5( u t - 0.01). a)What is the natural rate of unemployment? Graph the short-run and long-run

1.Consider the Phillips curve t = t-1 - 0.5(ut - 0.01).

a)What is the natural rate of unemployment? Graph the short-run and long-run relationships between inflation and unemployment. (5 marks)

b)How much unemployment is necessary to reduce inflation by 3%? Compute the sacrifice ratio. Show your work. (5 marks)

c)Do flexible exchange rates permit a country to pick its own unemployment-inflation trade-off target? (10 marks)

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