3. Answer both parts (a) and (b) of this question. (a) [8 marks] Explain the main features of the trade-off between infl

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3 Answer Both Parts A And B Of This Question A 8 Marks Explain The Main Features Of The Trade Off Between Infl 1 (105.52 KiB) Viewed 18 times

3. Answer both parts (a) and (b) of this question. (a) [8 marks] Explain the main features of the trade-off between inflation and unemployment implied by the Phillips curve when expectations are not considered in the analysis. (b) Assume that the Phillips curve for a given economy is given by: Tt = πt-1- 0.5 (ut 0.06), where it is the inflation rate at time t and ut is the unemployment rate at time t. (i) [6 marks] Explain the concept of the natural level of unemployment using the above Phillips curve. (ii) [6 marks] Draw the short-run and the long-run Phillips curve in the same graph. Explain the main differences between the two. (iii) [5 marks] Suppose that the Central Bank wants to reduce the inflation rate in period t by 5%. According to the Phillips curve defined above explain the effects of this policy in the short run. Find the sacrifice ratio for this policy assuming the Okun's law implies a 2% reduction in real GDP for a 1% increase in the unemployment rate.