Question

Consider the following short run Phillips Curve: p = pE – b(u – 0.06) where u...

  1. 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.

  1. Carefully graph the short and long-run Phillips Curve. What is NAIRU an acronym for? Illustrate the NAIRU in your diagram.
  2. Why is b believed to be positive? That is, why do economists believe that lower unemployment rates cause higher inflation?
  3. 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?       
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