Answer Happy

(b) Assume that the Phillips curve for a given economy is given by: t = πt-1- 0.5 (ut - 0.06), where is the inflation rate at time t and ut is the unemployment rate at time t. (1) [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.