Suppose the economy has the following Phillips curve. π = E*π - 2*(u-u^n)
Suppose the natural rate of unemployment is 5% and monetary policy targets 2% inflation for theupcoming year. Assume there are no shocks.
a) If inflation over the past year was 1.5%, what will unemployment have to be this year formonetary policy to achieve its inflation target?
b) If monetary policy maintains its 2% target, what must unemployment be NEXT year?