Suppose that the natural rate of unemployment equals 6%, and the public expect inflation to equal 4 %, and the coefficient a in PC equation = 0.4.
A) When actual and expected inflation are equal, unemployment Equal to natural rate of unemployment.
Each excess one percentage point inflation lead to 0.4 percentage Cyclical unemployment.
Actual inflation 2%
Excess inflation=2-4=-2%
Cyclical unemployment=-2*-0.4=0.8%
Unemployment rate=6+0.8=6.8%
Actual inflation=10%
Excess inflation=10-4=6%
Cyclical unemployment=6*-0.4=-2.4%
Unemployment rate=6-2.4=3.6%
B) actual inflation=2%
Excess inflation=2-2=0
Cyclical unemployment=0
Unemployment rate=6%
Actual inflation=10%
Excess inflation=10-2=8%
Cyclical unemployment=8*-0.4=-3.2%
Unemployment rate=6-3.2=2.8%
C) part a)
Part b)
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