Given the accelerationist Phillips curve Δπ = - 0.3 (U - 6)+ ρ,suppose that inflation in the preceding period was 3 percent,unemployment is 6 percent,and there is a price shock of 2 percent.The current inflation rate is ________.
A)3 percent
B)0.2 percent
C)5 percent
D)1 percent
E)none of the above

Question

Quizplus · Accepted Answer

Using the accelerationist Phillips curve equation:

Δπ = - 0.3(U - 6)+ ρ

We know that inflation in the preceding period was 3 percent, so ρ = 0.03. 
Also, unemployment rate is 6 percent.

With the given price shock of 2 percent, the change in inflation will be:

Δπ = - 0.3(6 - 6) + 0.03 + 0.02 = 0.05 or 5 percent.

Therefore, the current inflation rate is 5 percent, which is option C).

Given the Accelerationist Phillips Curve Δπ = - 0