Question: 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?