A Little Question

Rushden

Suppose that an economy can be described by the following three equations:
Ut - Ut-1 = -0.4(Gyt - 3% ) Okun's Law
?t - ?t-1 = -(Ut - 5% ) Phillips Curve
Gyt = Gmt - ?t Aggregate Demand

What is the natural rate of unemployment for this economy?

really have no idea how to go about calculating this so all help appreciated, Thanks

Économiste Monétaire

What is "?t" ? Assuming it's inflation (Pi), remember what the Phillips curve is,

[latex] \displaystyle \pi_{t} - \pi_{t}^{e} = - \gamma (U_{t} - U^{*}) [/latex]

If U* is the natural rate, what can you infer from your second equation?

Rushden

Économiste Monétaire wrote: »

What is "?t" ? Assuming it's inflation (Pi), remember what the Phillips curve is,

[latex] \displaystyle \pi_{t} - \pi_{t}^{e} = - \gamma (U_{t} - U^{*}) [/latex]

If U* is the natural rate, what can you infer from your second equation?

Yeah ? is pi I just don't know how to get the symbol for pi, so from the second equation the natural rate is just 5%?

Économiste Monétaire

Just write pi instead of '?'. Yes, it's 5%. Just think about what NAIRU is, non-accelerating inflation rate of unemployment; non-accelerating, i.e. constant. When [latex] \displaystyle \pi_{t} = \pi_{t-1} [/latex], we see that [latex] \displaystyle 0 = - \gamma (U_{t} - U^{*}) [/latex]

so

[latex] \displaystyle U_{t} = U^{*} [/latex]

which is 5% in your question.

irish_goat

Hello fellow 2nd year NUIM student.