Given the accelerationist Phillips curve Δπ = - 0.3 (U - 6)+ ρ,suppose that inflation in the preceding period was 3 percent,unemployment is 7 percent,and there is no price shock.The current inflation rate is ________.
A)2.7 percent
B)3 percent
C)0.9 percent
D)3.3 percent
E)none of the above

Question

Quizplus · Accepted Answer

Using the accelerationist Phillips curve:

Δπ = -0.3(U - 6) + ρ

where Δπ is the change in inflation rate, U is the unemployment rate, and ρ is the price shock.

Since there is no price shock (ρ = 0), we can substitute the values for inflation and unemployment into the equation:

Δπ = -0.3(7 - 6) + 0.03
Δπ = -0.3 + 0.03
Δπ = -0.27

This means that inflation is falling by 0.27 percentage points. To find the current inflation rate, we subtract this decrease from the previous inflation rate:

Current inflation rate = Previous inflation rate - Δπ
Current inflation rate = 3% - (-0.27%)
Current inflation rate = 3.27%

Therefore, the current inflation rate is 2.7 percent (Choice A).

Given the Accelerationist Phillips Curve Δπ = - 0