Question
1. (12 points in total) Suppose that the trade-off between unemployment and inflation is determined by the Phillips curve: = n ( ). In addition,
1. (12 points in total) Suppose that the trade-off between unemployment and inflation is determined by the Phillips curve: = n ( ).
In addition, suppose that the country involves two political parties, the Left and the Right. Suppose that the Left party follows a policy of high money growth, and the Right party always follows a policy of low money growth. What "political business cycle" pattern of inflation and unemployment would you predict under the following conditions?
1) Every four years, one of the parties takes control based on a random flip of a coin. (6 points)
2) The two parties take turns. (6 points)
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