Question: A country's economy is described in Table 2. Using information in Table 2, answer questions (2.1), (2.2), (2.3) and (2.4)
Phillips curve p -p-1=-0.55x( U-Un)
Natural rate of unemployment uN = 5%
Previous year's (2006) inflation rate 1 p - = 2%
(2.1) Suppose the government of the country decides to use policies to bring the country's actual unemployment rate to 4%. What will be this country's inflation rate p this year (2007)? Show both steps and answer.
(2.2) Compare this and previous year's inflation rate, is inflation accelerating or not? It will be accelerating if this year's inflation is higher than previous year's.
(2.3) Since inflation represents increase in price level, higher inflation rate this year than previous year means much higher price level this year. How can you explain why inflation accelerates when the government try to bring down unemployment?
(2.4) What will be the inflation rate in year 2008?