Problem
Phillips Curve:
a) If the equation for a country's Phillips curve is p = 0.03 - 0.25(u - 0.05), where p is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?
b) Assume that an economy has the Phillips curve p = p -1 - 0.25(u - 0.05). How many percentage point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points?
c) Describe the difference in assumptions between Adaptive Expectations and Rational Expectation? How does this difference impact the Federal Reserve Bank's ability to reduce inflation?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.