Question

Given πt= πt-1 -0.5(Ut -0.06)
I) where economy start at inflation rate of zero at t-1. And at time t unemployment rate is at natural level, what is the inflation rate at time t ?

Answer 1

If the economy starts at an inflation rate of zero at t-1 and the unemployment rate is at its natural level at time t, we can substitute these values into the equation to find the inflation rate at time t:

πt = πt-1 - 0.5(Ut - 0.06)

Since πt-1 (inflation rate at t-1) is zero, we have:

πt = 0 - 0.5(Ut - 0.06)

If the unemployment rate is at its natural level, we can assume that Ut = 0.06. Substituting this into the equation, we get:

πt = 0 - 0.5(0.06 - 0.06)
πt = 0 - 0.5(0)
πt = 0

Therefore, the inflation rate at time t is zero.