Equilibrium Levels of Unemployment and Inflation:

As we have seen prior the position of the Phillips curve depends on:

a) u* stand for natural rate of unemployment.

b) π^e stand for expected rate of inflation.

c) ε^s whether there are any present supply shocks affecting inflation.

The place of the aggregate demand curve the MPRF depends on:

a) u₀ the stage of unemployment when the real interest rate r is at what the central bank thinks of as its long-run average rate.

b) π’, the central bank’s target stage of inflation.

All five of these factors together, in conjunction with the parameters Φ and β--the slopes of the monetary policy reaction function and of the Phillips curve—determine the economy’s equilibrium inflation as well as unemployment rates.

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