Macroeconomics 5th Edition by Olivier Blanchard

Exercise 3

Mutations of the Phillips curve
Suppose that the Phillips curve is given by
a. What is the natural rate of unemployment Assume
and suppose that u is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 3% and hold it there forever.
b. Determine the rate of inflation in years t, t + 1, t + 2, and t + 5.
c. Do you believe the answer given in (b) Why or why not
(Hint: Think about how people are likely to form expectations of inflation.) Now suppose that in year t + 5, u increases from 0 to 1. Suppose that the government is still determined to keep u at 3% forever.
d. Why might u increase in this way
e. What will the inflation rate be in years t + 5, t + 6, and t + 7
f. Do you believe the answer given in (e) Why or why not