In a certain economy the expectations-augmented Philips curve is: Π = Πe - 2(u-u*) u* = 0,06 (natural rate of unemployment)
A. Graph the Phillips curve of this economy for an expected inflation rate of 0,1. If the central bank chooses to keep the actual inflation at 0,1%, what will be the unemployment rate?. If the central bank unexpectedly increases inflation, what will happen to unemployment and why
B. A demand shock raises expected inflation to 0,12. Graph the new Phillips curve. What happens to unemployment rate if the central bank holds inflation at 0,1% after the demand shock?
c. Suppose a supply shock raises the expected inflation to 0,12 and natural rate of unemployment to 0,08. Repeat part B.