12. The short-run Phillips curve can be represented by the following equation:

Unemployment Natural rate of /Actual Expected \

rate unemployment a linflation inflation J We have learned that expected inflation is well "anchored" at the Bank of Canada's target of 2 percent. Our best guess for the current value of the natural rate of unemployment is 7 percent. Finally, assume the value of variable a is 0.5.

a. Using the numerical values provided, sketch a diagram showing the long-run and the short-run Phillips curves.

b. If the unemployment rate is equal to the natural rate of unemployment, what is the actual rate of inflation?

c. What is the slope of the short-run Phillips curve you have sketched? Describe in words what the measure of slope represents.

d. Assuming that expected inflation and the value of the natural rate of unemployment are unaffected, to what level would the Bank of Canada need to increase the actual rate of inflation to lower the unemployment rate by 1 percentage point?