Okuns law and the Phillips curve

timer Asked: Mar 24th, 2015

Question description

Suppose the expectations augmented Phillips Curve for an economy is given by

π = πe + .08 – 2 u  where πe = π-1

Okun’s Law for this economy is  Δu = -0.5 (gy - .03)

Unemployment is initially equal to the natural rate of unemployment and has been for a number of years.  The annual inflation rate is initially ten percent (π = .1) and has been ten percent for a number of years.

a)  What is the natural rate of unemployment for this economy?  Show your calculation and explain why the unemployment rate cannot differ from this “natural rate” year after year.  

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