An Estimate of the Short-Run Phillips Curve for a Hypothetical

question 123

Essay

An estimate of the short-run Phillips curve for a hypothetical economy is u = 12 - 1.5p,where u is the unemployment rate and p is the inflation rate.
a. If the natural rate of unemployment is 8 percent, what is the expected inflation rate that is consistent with this short-run Phillips curve?
b. Suppose the government passes legislation that decreases the natural rate of unemployment by two percentage points. What is the new long-term inflation rate?

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