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

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

  1. What is the natural rate of unemployment? Graph the short-run and long-run relationships between inflation and unemployment.(5 marks)
  2. How much unemployment is necessary to reduce inflation by 3%? Compute the sacrifice ratio. Show your work.(5 marks)
  3. Do flexible exchange rates permit a country to pick its own unemployment-inflation trade-off target?(10 marks)

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