0 Ba Xnipl Suppose an economy has the Phillips curve 1|: = 7:-1 0.5(u u") and that the natural rate of unemployment is given by an average of the past two years' unemployment: u" = 0504.1 + 14.2) a. Why might the natural rate of unemployment depend on recent unemploymentas assumed in the preceding equation? [I Employed workers can anticipate the future price level and set the real wage above the equilibrium wage. El Unemployed workers lose job skills and thus nd it harder to obtain jobs. [I Workers still employed push wages above the equilibrium wage, so that some lower-skilled workers can no longer nd jobs. I] Advances in education render workers increasingly skilled, fueling intense competition for available jobs. b. Suppose the Bank of Canada follows a policy to permanently reduce the ination rate by 1 percentage point. What effect will that policy have on the unemployment rate over time? 0 Unemployment will be unaffected. O Unemployment will rise above its original level by 2 percentage points in the rst year and by l or more percentage points in every subsequent year. 0 Unemployment will rise above its original level by 3 percentage points in the rst year and by 2 or more percentage points in every subsequent year. Q Unemployment will rise above its original level by 2 percentage points in the rst year and revert to its original level in subsequent years. c. The sacrice ratio in this economy is d. The above equations imply that 0 there is no long-run tradeoff between ination and unemployment, but there is a short-run tradeoff. 0 there is a tredeoff between ination and unemployment in both the short run and long run. 0 there is no shortrun tradeoff between ination and unemployment, but there is a long-run tradeoif. 0 there is no tradeoff between ination and unemployment in either the short run or long run. Xnip # 13 It = _1 - 0.5(u -0.05) a. The natural rate of unemployment is 0.05% O 0% O 5% 50% b. In the accompanying diagram, identify the long-run Phillips curve (LRPC) and the short-run Phillips curve (SRPC). LRPC SRPC Inflation, n 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Unemployment, u (%) c. How much cyclical unemployment above the natural rate of unemployment is necessary to reduce inflation by 4 percentage points? 50 percentage points 8 percentage points 13 percentage points 5 percentage points d. Using Okun's law, compute the sacrifice ratio. Sacrifice ratio