- Consider the following short run Phillips Curve:
p = pE – b(u – 0.06)
where u is the unemployment rate, p is
the inflation rate, pE is the expected rate of
inflation, and b is a parameter.
- Carefully graph the short and long-run Phillips Curve. What is
NAIRU an acronym for? Illustrate the NAIRU in your diagram.
- Why is b believed to be positive? That is, why do economists
believe that lower unemployment rates cause higher inflation?
- Explain why some economists believe that b has permanently
fallen and is close to zero? Why do other economists believe that
the decline in b is temporary?