Answer to Question #290431 in Macroeconomics for vena

Question

Consider a central bank that has an inflation target, π*. The Phillips curve is given by,

πt- πt-1 = -α(ut-un).

a) Is the central bank likely to be able to hit its inflation target every period? Explain

b) Suppose the natural rate of unemployment, Un, changes frequently. How will these changes

affect the central bank’s ability to hit its inflation target? Explain.

Answer 1

a) The central bank is likely to be able to hit its inflation target every period, if the natural unemployment rate is stable, there is no cyclical unemployment, and other main macroeconomic indicators are stable.

b) If the natural rate of unemployment, Un, changes frequently, then these changes will decrease the central bank’s ability to hit its inflation target, as it would need to count every change in the natural unemployment rate.