6. [ Exercise6 ( 20marks) ]

Suppose that the Phillips curve is given by :

tte=0.08+0.1m2ut

wheremis the markup of prices over wages.

Suppose thatmis initially equal to 20% but that as a result of a sharp increase in oil prices,mincreases to 40% in yeartand after.

3

1. (a)( 5 marks) Why would an increase in oil prices result in an increase inm?
2. (b)( 5 marks) Find the natural rate of unemployment in this economyun, as a
3. function ofm.
4. (c)( 5 marks) What is the long-run effect of the increase inmon the natural rate of unemployment?( Hint: you can compute the change in unwhen m changes from 20% to 40%)

(d) ( 5 marks) Same question as in (c) but with the following Phillips curvette=0.08+0.1m4ut