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Assume That an Economy Is Governed by the Phillips Curve π\pi

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Assume that an economy is governed by the Phillips curve π\pi = π\pi e - 0.5(u - 0.06), where π\pi = (P - P-1)/P-1, π\pi e = ( π\pi e - P-1)/P-1, and 0.06 is the natural rate of unemployment. Further assume π\pi e = π\pi -1. Suppose that, in period zero, π\pi = 0.03 and π\pi e = 0.03-that is, that the economy is experiencing steady inflation at a 3-percent rate. Assume that an economy is governed by the Phillips curve \pi = \pi <sup>e</sup> - 0.5(u - 0.06), where \pi = (P - P<sub>-</sub><sub>1</sub>)/P<sub>-</sub><sub>1</sub>, \pi <sup>e</sup> = ( \pi <sup>e</sup> - P<sub>-</sub><sub>1</sub>)/P<sub>-</sub><sub>1</sub>, and 0.06 is the natural rate of unemployment. Further assume \pi <sup>e</sup> = \pi <sub>-</sub><sub>1</sub>. Suppose that, in period zero, \pi = 0.03 and \pi <sup>e</sup> = 0.03-that is, that the economy is experiencing steady inflation at a 3-percent rate.

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