The Relationship Between Inflation and Unemployment Is Given by
π $\bar u$

question 50

Essay

The relationship between inflation and unemployment is given by
π = π^e - 2(u - $\bar u$ ).
(a)Draw a diagram showing a long-run Phillips curve and two short-run Phillips curves that contain the following points:
A: π = .03,π^e = .03
B: π = .06,π^e = .06
C: π = .03,π^e = .06
D: π = .06,π^e = .03
Label points A,B,C,and D in your diagram.
The unemployment rate at point A equals .05.
(b)What are the values of the natural rate of unemployment and the unemployment rates at points B,C,and D?

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