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What is the cyclical unemployment rate

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Consider an economy in long-run equilibrium with an inflation rate π of 12% (=0.12) per year and a natural unemployment rate, un of 4% (=0.04). The Phillips curve is π = πe - 2(u - un). Assume that Okun's law holds so that a 1% increase in the unemployment rate maintained for one year reduces GDP by 3% of full-employment output.

  1. What is the cyclical unemployment rate in that year?
  2. Consider a two-year disinflation. In the first year, π = 0.06 and πe = 0.09. In the second year, π = 0.06 and πe = 0.06. What are the unemployment rates in the first and second year?
  3. By what percentage does output exceed the full-employment in the first and second year respectively?

Reference no: EM132415053

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