Assume that the Phillips curve equation is represented by nt

Question

Assume that the Phillips curve equation is represented by nt - nt- 1 = (m + z) - aut. Given this information, the natural rate of unemployment will be equal to:

Quizplus · Accepted Answer

The natural rate of unemployment is the rate of unemployment at which inflation is stable or the rate of unemployment that exists when the economy is in equilibrium. In the given Phillips curve equation, nt represents the actual rate of unemployment, nt-1 represents the previous period's rate of unemployment, m represents the growth rate of money supply, z represents the exogenous variable, and a represents the sensitivity of inflation to unemployment.

The natural rate of unemployment occurs when there is no inflationary or deflationary pressure in the economy, which means that the actual rate of unemployment is equal to the expected rate of unemployment. When the actual rate of unemployment equals the expected rate of unemployment, the difference between the actual and previous period's rate of unemployment is zero. Therefore, the natural rate of unemployment can be calculated by setting nt - nt-1 = 0 in the given Phillips curve equation, which gives:

(m + z) - aut = 0
(m + z) = aut
nt = u* = (m+z)/a

Thus, the natural rate of unemployment is (m+z)/a, which is Option A.