Answer to Question #123115 in Economics for Aymen

Question

Show that the inflation-unemployment model can be condensed into a second order differential equation in the variable p. [find time path p(t)]

Answer 1

Blanchard offers an alternative treatment of the relationship between inflation and unemployment. He introduces in the model the natural rate of unemployment Un at which the actual and the expected inflation rates are equal. The rate of change of the inflation rate is proportional to the difference

between the actual unemployment rate U and the natural rate of unemployment.

With the passage of time actual unemployment cannot substantially deviate from the natural rate of unemployment.