2. In a particular economy the negative oil price shock occurs in two different time periods, say 1990–1995 and 2000–2005. Assume that these two oil price shocks are similar in nature. Given the same expected inflation rate, the amount of unanticipated inflation due to both shocks is the same. The only difference between these two periods is the labor market, which is more deregulated during the latter period than the earlier period, and thus workers’ wages are more responsive to the labor market condition in the latter period.

Given the above information, how are the unemployment rate and the natural unemployment rate affected in both periods? Which period has a flatter slope of the expectations-augmented Phillips curve?

Explain your answer.