Compute the natural rate of unemployment

Reference no: EM13213235

Suppose that the Phillips curve is given by ?t-?t^e= 0.1-2?t where ?t^e=?t-1 Suppose that inflation in year t-1 is zero. In year t, the authorities decide to keep the unemployment rate at 4% forever.

1. Compute the natural rate of unemployment. Does it depend on the way people form their expectations of inflation?

2. Discuss the way people form expectations of inflation is modeled.

3. Compute the rate of inflation for years t, t+1, t+2 and t+3.

4. Now suppose that half the workers have labor contract in which their wages are indexed on inflation. ?t^e=0.5?t+0.5?t-1

a. What is the new Phillips curve?

b. Compute the rate of inflation for years t, t+1, t+2 and t+3.

c. What is the effect of wage indexation on the relation between inflation and unemployment?

Reference no: EM13213235

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