Question

12.10 (a) Given the short run Phillips curve: p = pe – 4(u – ū) where...

12.10 (a) Given the short run Phillips curve: p = pe – 4(u – ū) where the natural rate of unemployment (ū) is 8% and expected inflation (pe) is 12%, what will the unemployment rate be if the inflation rate is 6%. (b) Illustrate the Phillips curve from part (a) labeling everything AND indicating on your diagram where the economy is given its 6% inflation rate.

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Answer #1

a) p= pe- 4(u-ū) given pe = 12 %, ū = 8 %, inflation rate(p) = 6 %,

6= 12-4(u-8)

6= 12-4u + 32

6= 44- 4u

4u= 44-6

u= 38/4 = 9.5 %, Unemployment rate = 9.5 % when inflation is 6 %.

b) Phillips states that there is an inverse and stable relationship between inflation and unemployment rates .When the inflation is high , it would result in more jobs and there less unemployment.

The point A is marked in the graph where, inflation rate is 12 % and unemployment rate is 8 % and Point B is marked where inflation rate is 6 % and unemployment rate is 9.5 %. and the curve obtained by joining these two points is called the Phillips curve

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