Answer Happy

2. Suppose we have an economy with Phillips curve 7 = 1 + (m +z) - au. Recall the price setting equation P= (1 + m)W = (1+m)PF(u, z) = (1 + m)P® (1 - au+z) Suppose a = , m = z = 20 a Calculate the natural rate of unemployment. т
b Now suppose that half of the working population has its wages indexed - that is, they have a constant real wage w. Derive the new Phillips curve in this economy. (Hint: first work out what the function F looks like for workers with indexed wages, then average this with the original F. You should end up with a function that looks like F*(u, z) = 1-a*u+z* - then plug the values of a, z, m into the equation for the Phillips curve.) c What's the new natural rate of unemployment? Is it higher or lower than before? d Explain the intuition behind your answer in c. с