If the equation for a country's Phillips curve is $\pi$ = 0.02 - 0.8(u - 0.05), where $\pi$ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?
A) above 2 percent (0.02)
B) below 2 percent (0.02)
C) 2 percent (0.02)
D) -2 percent (-0.02)

Question

If the equation for a country's Phillips curve is  $\pi$ = 0.02 - 0.8(u - 0.05), where  $\pi$ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?
A) above 2 percent (0.02)
B) below 2 percent (0.02)
C) 2 percent (0.02)
D) -2 percent (-0.02)

Quizplus · Accepted Answer

Substitute 0.04 for u in the equation: 
F1F1F1S1F1F1F10 = 0.02 - 0.8(0.04 - 0.05) 
F1F1F1S1F1F1F10 = 0.02 + 0.08 = 0.10 
Therefore, the inflation rate is 10 percent or 0.10. Since 0.10 is greater than 0.02, the answer is A, above 2 percent.

If the Equation for a Country's Phillips Curve Is π\piπ = 002 - 08(u - 0

If the Equation for a Country's Phillips Curve Is $\pi$ = 002 - 08(u - 0