2. Suppose we have an economy with Phillips curve π^e = π + (m + z) − αu. Recall the price setting equation P = (1+m)W =
Posted: Sun May 08, 2022 9:40 am
2. Suppose we have an economy with Phillips curve π^e = π + (m +
z) − αu. Recall the price setting equation
P = (1+m)W = (1+m)P^eF(u,z) = (1+m)P^e(1−αu+z)
Suppose α = 1/5 , m = z = 1/20 .
a) Calculate the natural rate of unemployment.
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−α^∗u+z^∗ - then plug the values of α, 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.
z) − αu. Recall the price setting equation
P = (1+m)W = (1+m)P^eF(u,z) = (1+m)P^e(1−αu+z)
Suppose α = 1/5 , m = z = 1/20 .
a) Calculate the natural rate of unemployment.
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−α^∗u+z^∗ - then plug the values of α, 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.