Suppose that the Phillips curve is given by : t e t = 0.08 + 0.1m 2ut where m is the markup of prices over wages. Suppose that m is initially equal to 20% but that as a result of a sharp increase in oil prices, m increases to 40% in year t and after.

(a) Why would an increase in oil prices result in an increase in m?

(b) Find the natural rate of unemployment in this economy un, as a function of m.

(c) What is the long-run effect of the increase in m on the natural rate of unemployment? ( Hint: you can compute the change in un when m changes from 20% to 40%)

(d) Same question as in (c) but with the following Phillips curve t e t = 0.08 + 0.1m 4ut