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Question No. 2 Suppose that an economy has the following
Phillips curve: π= π-1 – 0.5 (u – 0.06) with adaptive
expectations. You are given the following information for the years
2009 through 2011: Table 1

Years Pi – Pi-1 Pi Pi-1 U Un

2009

0 .08 .08 .06
2010 0 .08 .08 ,06
2011 0 .08 .08 ,06
2012
2013
2014
2015
2016
2017
2018
2019
2020

a. What is the natural rate of unemployment (Un)? Holding Un
constant, fill in the column labeled Un in Table 1 through
2020.

b. Graph the short-run and long-run relationships (the Phillips
Curves) between inflation and unemployment.

c. Suppose we have a very inflation – averse Federal Reserve,
how much cyclical unemployment is necessary if the Fed wants to
reduce the inflation rate from 8 percent to 3 percent in 2012 (one
year)? Fill in the above table through 2020

d. Prepare a graph to show the adjustments from 2011 to
2012.