The Phillips curve relation for an economy is where . Suppose inflation in year is 2 percent. In year , the central bank decides to keep the unemployment rate at 3 percent forever. Find the rate of inflation for years , , and . (Notation: actual inflation , expected inflation , unemployment .)
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The Phillips curve relation for an economy is πₜ - πₜ^e = 0.1 - 3uₜ where πₜ^e = πₜ₋₁. Suppose inflation in year (t-1) is 2 percent. In year t, the central bank decides to keep the unemployment rate at 3 percent forever. Find the rate of inflation for years t, t+1, t+2 and t+3. (Notation: actual inflation πₜ, expected inflation πₜ^e, unemployment uₜ .) (A) 1%, 2%, 3% and 4% respectively (B) 2%, 3%, 4% and 5% respectively (C) 3%, 4%, 5% and 6% respectively (D) 2%, 4%, 5% and 6% respectively
Also written as: The Phillips curve relation for an economy is pi_t - pi_t^e = 0.1 - 3u_t where pi_t^e = pi_(t-1). Suppose inflation in year (t-1) is 2 percent. In year t, the central bank decides to keep the unemployment rate at 3 percent forever. Find the rate of inflation for years t, t+1, t+2 and t+3. (Notation: actual inflation pi_t, expected inflation pi_t^e, unemployment u_t .)
Inflation, unemployment and the Phillips curve has come up 106 times in 7 exams since 2006.
This question is on The expectations-augmented Phillips curve, part of Inflation, unemployment and the Phillips curve in Macroeconomics.
How expected inflation shifts the trade-off and makes it vertical in the long run.
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