In the expectations-augmented Phillips curve π = πᵉ - 3(u - .06),the natural rate of unemployment is
A)0.02.
B)0.03.
C)0.06.
D)18.

Question

Quizplus · Accepted Answer

In the expectations-augmented Phillips curve, the coefficient of u (unemployment rate) is -3. The natural rate of unemployment is the value of u at which inflation remains constant, i.e., π = πᵉ. So, setting π = πᵉ in the Phillips curve and solving for u, we get u = 0.06. Therefore, the natural rate of unemployment in this model is 0.06 or 6%.

In the Expectations-Augmented Phillips Curve π = πᵉ - 3(u