Assume that an economy has the Phillips curve π = π -1
- 0)5(u - 0.06). Then the natural rate of unemployment is:

Question

Quizplus · Accepted Answer

The Phillips curve formula given in the question is π = π -1 - 0.5(u - 0.06). In this formula, π represents the inflation rate and u represents the unemployment rate. The term π -1 represents the target inflation rate for the economy. The coefficient -0.5 represents the sensitivity of inflation to changes in unemployment.

To find the natural rate of unemployment, we need to find the level of unemployment at which inflation is equal to the target inflation rate. So, we set π = π -1 and solve for u:
π -1 - 0.5(u - 0.06) = π -1
- 0.5(u - 0.06) = 0
u - 0.06 = 0
u = 0.06

Therefore, the natural rate of unemployment in this economy is 0.06 or 6%. This is the level of unemployment at which there is no upward or downward pressure on inflation in the long run.

Assume That an Economy Has the Phillips Curve π =