Question

(25) 2 - Explain whether the following statements are true or false. Explain your answer in a brief but rigorous way, by making explicit reference to the relevant theory. Lack of proper explanations will result in "zero" points. a. If a = 1,-1, from the expectations augmented Phillips curve it follows that, to bring the unemployment rate below its natural level, policymakers must be willing to tolerate an increase in the rate of inflation. b. The smaller the fraction of wages indexed to the inflation rate, the larger the increase in inflation associated with any given decrease in the rate of unemployment.

Answer 1

A) true

bcoz as per augmented Phillips curve, there exists inverse relationship between inflation & Unemployment rate

So if U falls below natural level,

Then inflation will be above previous period inflation level

B) false

​​​​​If lesser number of labor contracts are indexed to inflation, then as Unemployment falls , then the effect on inflation will be lesser, bcoz less number of contracts have to be adjust for inflation