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Question Three {16 marks} Previous Exam Question An economy has the following Phillips curve 11': EJ'F [Lilla ii} The economy begins at the natural rate
Question Three {16 marks} Previous Exam Question An economy has the following Phillips curve 11': EJ'F [Lilla ii} The economy begins at the natural rate of unemployment with a 5% stable ination rate. a WT is the natural rate of unemployment for this economy? b Graph the shortterm Phillips curve. Label on the graph point A that describe the initial position ofthe economy given the information above. c- A fall in AD causes a recession 1which leads to the unemployment rate to increase by 4 percentage points above the natural rate. On the graph from part {b}. label this new position by point Bi providing numerical values. d Suppose in the long run1 the expected ination is 1.92%. Label the shortterm trade off faced by the economy on the graph in part [b]., providing numerical values
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