Assume that an economy has the Phillips curve π = π -1
- 0)5(u - 0.06). How many percentage point-years of cyclical
Unemployment are needed to reduce inflation by 5 percentage points?

Question

Quizplus · Accepted Answer

According to the Phillips curve equation, π = π-1 - 0.5(u-0.06) where π represents inflation and u represents unemployment. To reduce inflation by 5 percentage points, we need to find the change in unemployment (u).
Δπ = -5
Δu = (Δπ + 0.5(0.06))/(-0.5)
Δu = ( -5 + 0.03) / (-0.5)
Δu = -9.94
Therefore, we need a decrease in unemployment of around 10 percentage points (since the question asks for percentage point-years, it may take several years to achieve this reduction). Hence, the correct answer is B) 10.

Assume That an Economy Has the Phillips Curve π =