Assume that an economy has the Phillips curve $\pi$ = $\pi$_-₁ - 0.5(u - 0.06).How many percentage point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points? A) 20 B) 10 C) 5 D) 2.5

Question

Quizplus · Accepted Answer

To reduce inflation by 5 percentage points, we need to move down along the Phillips curve by 5 percentage points. Using the given Phillips curve equation, we can see that a 1 percentage point increase in unemployment (u) reduces inflation (π) by 0.5 percentage points.

Therefore, to reduce inflation by 5 percentage points, we need to increase unemployment by (5/0.5) = 10 percentage point-years.

Hence, the answer is B) 10.

Assume That an Economy Has the Phillips Curve π\piπ = π\piπ -1 - 0

Assume That an Economy Has the Phillips Curve $\pi$ = $\pi$ _-₁ - 0