9. Suppose that the Phillips curve is given by TtTt-1-a(ut -ut-1) where un = (m+z)/a. Recall that this Phillips curve wa

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9 Suppose That The Phillips Curve Is Given By Tttt 1 A Ut Ut 1 Where Un M Z A Recall That This Phillips Curve Wa 1 (35.44 KiB) Viewed 22 times

9. Suppose that the Phillips curve is given by TtTt-1-a(ut -ut-1) where un = (m+z)/a. Recall that this Phillips curve was derived in this chapter under the assumption that the wage-bargaining equation took the form W = Pe(1-au, + 2) We can think of a as a measure of wage flexibility-the higher a the greater the response of the wage to a change in the unemployment rate, ut. a. Suppose m = 0.03 and z = 0.03. What is the natural rate of unemployment if a = 1? if a = 2? What is the relation between a and the natural rate of unemployment? Interpret your answer. b. Suppose that as a result of an oil price increase, m increases to 0.06. What is the new natural rate of unemployment if a = 1? If a α = 2? Would an increase in wage flexibility tend to weaken the adverse effect of an oil price increase?