EC390 Lecture 12: Chapter12_answers
Document Summary
Chapter 12: maintaining low unemployment, un=0. 1/2 =5, t =0. 1-2*. 03 = 4% every year beginning with year t. t= 0 and t=4% forever. Might increase because people"s inflation expectations adapt to persistently positive inflation. The increase in has no effect on un: 5= 4+. 1-. 06=4%+4%=8% For t > 5, repeated substitution implies, t= 5 + (t - 5)*4%. This is unlikely people will most likely adjust : indexation of wages, t = t-1 + 0. 1 - 2ut = t-1 + 2%=2% As indexation increases, if the government wants to keep unemployment constant forever, indexation leads to leads to a larger increase in inflation over time. A higher cost of production means a higher markup of prices over wages. The markup reflects all non-wage components of the price of a good: un=(0. 08+0. 1m)/2; thus, the natural rate of unemployment increases from 5% to 6 % as m increases from 20% to 40%.
