2. Phillips Curve Suppose that an economy has the Phillips curve: = 1 0.5(u u n ), and that the natural rate of unemployment is given by an average of the past two years' unemployment: u n = 0.5(u1 + u2). 1 1. Why might the natural rate of unemployment depend on recent unemployment (as is assumed in the above equation)? 2. Suppose that the Bank of Canada follows a policy to reduce the inflation rate permanently by 1 percentage point. What effect will that policy have on the unemployment rate over time? 3. What do these equations imply about the short-run and long-run tradeoffs between inflation and unemployment?