DSE 2007 Question 32: Inflation, unemployment and the Phillips curve
Setup, from Q31 of the paper:
An economy sets the nominal wage W=Pe(1−αu) (workers, expected price Pe, unemployment u, 0<α<1) and the actual price P=(1+λ)W (producers, markup λ>0). If the workers always correctly guess the price level, then the rate of unemployment will always be maintained at a level given by:
(Same wage-price economy.) There will always be full employment of the aggregate stock of labour force if and only if the expected and the actual price level are related in the following way:
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Setup, from Q31 of the paper: An economy sets the nominal wage W=P^e(1-α u) (workers, expected price P^e, unemployment u, 0<α<1) and the actual price P=(1+λ)W (producers, markup λ>0). If the workers always correctly guess the price level, then the rate of unemployment will always be maintained at a level given by: (Same wage-price economy.) There will always be full employment of the aggregate stock of labour force if and only if the expected and the actual price level are related in the following way: (A) P/P^e=1 (B) P/P^e=1+λ (C) P/P^e=(1+λ)/(1-α) (D) P/P^e=(1+λ)(1-α)
Also written as: Setup, from Q31 of the paper: An economy sets the nominal wage W=P^e(1-alpha u) (workers, expected price P^e, unemployment u, 0<alpha<1) and the actual price P=(1+lambda)W (producers, markup lambda>0). If the workers always correctly guess the price level, then the rate of unemployment will always be maintained at a level given by: (Same wage-price economy.) There will always be full employment of the aggregate stock of labour force if and only if the expected and the actual price level are related in the following way:
Inflation, unemployment and the Phillips curve has come up 106 times in 7 exams since 2006.
What this question tests
This question is on The natural rate of unemployment and NAIRU, part of Inflation, unemployment and the Phillips curve in Macroeconomics.
The unemployment rate consistent with stable inflation and what determines it.
TestStop has 19 past-paper questions on this subtopic.
