Using macroeconomic relations:

a. Okun’s law states that when output growth is higher than usual, the unemployment rate tends to fall. Explain why usual output growth is positive.

b. In which year—a year in which output growth is 2% or a year in which it is –2%—will the unemployment rate rise more?

c. The Phillips curve is a relation between the inflation rate and the unemployment rate. Using the Phillips curve, is the unemployment rate zero when the rate of inflation is 2%?

d. The Phillips curve is often portrayed as a line with a negative slope. In Figure 2-6, the slope is about -0.17. In your opinion, will the economy be “better” if the line has a large slope, say –0.5, or a smaller slope, say -0.1?

Data from Figure 2-6

Transcribed Image Text:

Core inflation rate 3.0 2.5 2.0 1.5 1.0 0.5 0.0 I A Ch 3.0 4.0 5.0 6.0 7.0 Unemployment rate g L L ! 8.0 9.0 10.0