Question

Consider the following Philips Curve.

? = Eπ − 0.6 (?−0.05)

A) Interpret the Philips Curve. ( 5 points)

B) Assume that Eπ=0.02. Draw the graph of the Philips Curve and call it Figure 1. What is the slope of the Graph? What are the long-run unemployment rate and the long-run inflation rate? ( 5 points)

C) Is there any possibility that a government can decrease the inflation rate without any change in the unemployment rate? If yes, how? Explain it. ( 5 points)

D) Is there any possibility that a government can increase (!) the inflation rate without any change in the unemployment rate? If yes, how? Explain it. ( 5 points)

E) Considering the Philips Curve as ? = 0.02 − 0.6 (?−0.05), and the government announces that it implements an expansionary monetary policy:

• • E1) Describe the Locus Critique. ( 5 points)
• • E2) Considering the Locus Critique, do you think that the above Philips Curve is a good equation to study the relationship between inflation and unemployment? Why? Explain it. ( 5 points

Answer 1

A) the Philips Curve equation describes that as the u-0.05 is the unemployment gap where u is the actual unemployment rate and 0.05 is the natural unemployment rate. now if the u increases by one percent then the inflation rate will increase by 0.6 or 60 percent. now if u>0.05 the the wage inflation rate negative and if u<0.05 then wage inflation rate will be positive.