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Question 2. An Estimate of the Natural Rate of Unemployment [2 marks] Using the natural rate of unemployment, the Phillips curve equation can be rewritten
Question 2. An Estimate of the Natural Rate of Unemployment [2 marks] Using the natural rate of unemployment, the Phillips curve equation can be rewritten as: at 7r? = B (ut u*) + g (aggregate-supply factors), (1) where B is assumed to be positive, and the minus sign implies that the relationship is inverse. (a) What data are required to estimate equation (1)? Discuss. [1.0 mark] (b) Let us assume that we obtain the following estimation of the equation of the regression line (1): t a: = 1.4 O.22ut +erron Could you use this equation to estimate the natural rate of unemployment? Explain. [1.0 mark]
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