Question

looking for help and an explanation with the answer please!

In a certain economy the expectations-augmented Phillips curve is: Inflation Rate (%) 30- T- 2 (u - u) and u = 7% 25- 1.) Use the line drawing tool to draw the short-run Phillips curve of this economy for an expected inflation rate of 8%. Label this line 'PCoriginal 20- 2.) Using the line drawing tool, suppose an aggregate demand shock (resulting from increased military spending) raises expected inflation to 12% (the natural unemployment rate is unaffected). Draw the new short-run Phillips curve and label this line 'PCshock' 15- (u = 7%, = 8%) 10- What is the new unemployment rate if the Fed holds actual inflation at 8%? 5- Unemployment = % (enter your response as a percentage rounded to one decimal place). 0- 30 10 15 20 Unemployment Rate (%) 25 ह

Answer 1

In a certain ciononny the expectations au griented 1 Phillip's curie is 'T = Te_2.(4.-u)... Tuote that when u=ū, atle, u is the natural nemployment AS I rate of unemployment). To In the following diagram, we have drawn the 1 Phillips wrue for the economy in question is one Inflation (%) I . ----SB. PCshock . Coriginal, ģ unemployndent (%). In the above diagram, pe original is the Phillips lurue on which the conomy lies initially Point it corresponds to the fact that the economy has, au inflation rate of 8% while the unemployment is at 7% (the natural rate of themployment). (Note: Pe is the Phillips cuine on which the inflation rate is 0%, while unemployment is at its natural lewelp 71,

2) As the expected inflation increases to 12% due fól an inerease in inggregate Demand, the Phillips Curae sulfite to the right from PC original to PC + shock although the natural, unemployment rate is unaffected. There, we have to consider expected inflation as a parameter, which shifts the Phillips to the right (tett) as It increases (decreases).J . right (ret ..... Due to this shift in the Phillips come... the unemployment rate fucreases than the natural rates and given that economy's actual inftátion rate' vchanged, Mie eišmany inconies: from, point A to point B. To And the new unemployment rate : We have :- Actual Tanflation 1 1 - 80% Expected Inftation: -12% Natural Rate of unemployment :ū = 7% Therefore, TI = Te – 2 (u - u). >) 8 = 12 - 2 (4-7). *) it-2 = 1 remains on your writintia . -> U21 were U=7+2.9. feb U=9. 13 de Thus, the new unemployment rate, if the Fed holds aitwal inflation at 5% is; 9%