Long-run relationships between inflation and unemployment

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Suppose that an economy has the Phillips curve

(a) What is the natural rate of unemployment?

(b) Graph the short-run and long-run relationships between inflation and unemployment.

(c) How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okuni´s law, compute the sacrifice ratio.

(d) Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.

Reference no: EM13979209

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