Question

According to the Phillips Curve equation, what is the expression for inflation rate when cyclical unemployment is zero?

Answer 1

The Phillis curve equation is given by

=e - b ( U-U_n)+ V

= inflational rate.

e= expected inflation rate

V= supply shocks

U= actual rate of unemployment.

U_n= natural rate of unemployment.

Cyclical unemployment can be defined as the difference between actual rate of unemployement and natural rate of unemployment.

Cyclical unemployment is zero implies ( U-U_n) is 0.

That means the inflation rate is given by.

=e + V

ie inflation depends only on the expected inflation rate and on supply shocks.