Question

Problem 7 Wage setting curve 25-Bargaising gao Price seting curve Employment, N Phillips curves Inaion () bargaining pap ) Inarion () bargaining pap ) epected infation (31 expected infation (5%) U-3% Employment, N mployment at labour market equilibrium no bargaining gap (u-6%) Figure 2: Figure showing how expectations can shift the Phillips curve Copy Figure 2, making sure you leave plenty of space to the left of the 6% unemployment marker. Assume that from an initial position at A, there is a negative shock to private sector s depressed private investment, which raises unemployment to 9% demand such 1. Show the inflation, expected inflation/deflation, and the bargaining gap at the new level of unemployment on your diagram. the following two years, 2. What do you predict will happen to inflation/deflation over assuming there is no further change in unemployment? 3. Draw the Phillips curves and write a brief explanation of your findings. 7 (x)u ae uoge a3em jeay Wage-setting curve 2%-Bargaining gap Price-setting curve Employment, N Phillips curves Inflation (%) bargaining gap (%) B Inflation (%) bargaining gap (%) expected inflation (3%) expected inflation (5%) U-3% Employment, N Employment at labour market equilibrium, no bargaining gap (U-6%) Fiare showing hou evnectations can shift the Phillins cure Fire Real wage Inflation rate, TT (% )

Answer 1

emplgnend mation A Sxpectead datation Tnlation 37 ment - meut Hore lbecomeA 4ne demand hon us Tis is ec- abon is cwrve ne w Cas the As wage isaxoibli in madim tom (2) at Damdl E