Answer to Question #68108 in Macroeconomics for Frances Fitzgerald

Question

Assume that the Phillips curve is as follow: πt=πt^E + 0.2-4ut

πt = current rate of inflation

πt^E = expected rate of inflation

>>> Calculate the natural rate of unemployment rate (Un)

>>> Now, assume that inflation has been lower than expected by 2 percent points. Calculate the current unemployment rate and the natural unemployment rate.

Answer 1

According to the formula of Philips curve it should be represented in the following way: Pt=Pte-a(Ut –Ut*)+ b, where Pt is the inflation level for period t, Pte is expected level of inflation rate at period t, Ut represents the unemployment rate for period t, Ut* is natural unemployment rate, b is the constant shows some shocks and a is parameter that shows how will change Pt according to the changes in the gap of unemployment and natural unemployment rates.
Your equation is represented in this way: Pt=Pte-4Ut+0.2.
A) Comparing these two Philips curves I came to the conclusion that in your economy natural rate of unemployment is absent, it just means Ut*=0.
B) Form your data we can resume that Pte-Pt is equal to 2 %, so putting it into the equation you have represented and doing some mathematical operations we will get that Ut=0.6, which means that in your economy the unemployment rate at time t is equal to 0.6% and again Ut*=0%.