Suppose that an economy has the Phillips curve = 1 0.5( u 0.06). a.

Question:

Suppose that an economy has the Phillips curve
π = π−1 − 0.5( u − 0.06).
a. What is the natural rate of unemployment?
b. Graph the short-run and long-run relationships between inflation and unemployment.
c. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio.
d. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.