Consider the following Philips Curve.

= E 0.6 (0.05)

A) Interpret the Philips Curve. ( 5 points)

B) Assume that E=0.02. Draw the graph of the Philips Curve and call it Figure 1. What is the slope of the Graph? What are the long-run unemployment rate and the long-run inflation rate?

C) Is there any possibility that a government candecreasethe inflation rate without any change in the unemployment rate? If yes, how? Explain it.

D) Is there any possibility that a government canincrease(!) the inflation rate without any change in the unemployment rate? If yes, how? Explain it.

E) Considering the Philips Curve as = 0.02 0.6 (0.05), and the government announces that it implements an expansionary monetary policy:

• E1) Describe the Locus Critique.
• E2) Considering the Locus Critique, do you think that the above Philips Curve is a good equation to study the relationship between inflation and unemployment? Why? Explain it.