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Suppose that a supply shock raises expected inflation to 12%(0.12) and raises the natural unemployment rate to 8% (0.08). Sketch the new Phillips curve and
Suppose that a supply shock raises expected inflation to 12%(0.12) and raises the natural unemployment rate to 8% (0.08). Sketch the new Phillips curve and compare it to the curve you drew in part a \& b. Again, find the inflation rate when unemployment equals 10% (i.e., .10) and 4% (i.e., .04). What happens to the unemployment rate if the Fed holds actual inflation at 0.10? Explain. 3. Suppose an economy has the following expectations augmented Phillips curve: =e2(uu) and the natural rate of unemployment (u) is 6% (i.e., .06)
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