If the equation for a country's Phillips curve is π = .02 - .8(u - .05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (.04)?
A)above 2 percent (.02)
B)below 2 percent (.02)
C)2 percent (.02)
D)-2 percent (-.02)

Question

Quizplus · Accepted Answer

Substitute u = 0.04 into the equation: π = 0.02 - 0.8(0.04 - 0.05) = 0.02 + 0.008 = 0.028, which is above 2 percent.

If the Equation for a Country's Phillips Curve Is π