The Phillips Curve in Lowland Takes the Form π =

Question

Examlex · Accepted Answer

The Answer is a. Both countries have a natural rate of unemployment of 5 percent, and the slope of the Phillips curve is the same in both countries. The Phillips curves in both countries indicate a short-run tradeoff between more inflation and less unemployment.
b. The expected rate of inflation is higher in Highland (8 percent) than in Lowland (4 percent). The actual rate of
inflation is also higher in Highland (4 percent) than in Lowland (2 percent).
c. The policymakers in Highland will face twice the increase in the inflation rate as the policymakers in Lowland when they both attempt to reduce unemployment. For example, to reduce the unemployment rate to 5 percent, the inflation rate will increase from 2 percent to 4 percent in Lowland, but will increase from 4 percent to 8 percent in Highland. It will require a much higher rate of inflation in Highland to achieve the same rate of unemployment as Lowland.

The Phillips Curve in Lowland Takes the Form π =

Definitions: