Also, where does the point on the graph go? The following graph shows the short-

Question

Also, where does the point on the graph go?

The following graph shows the short-run Phillips curve within the expectations framework. On the graph, Place the grey star point to illustrate a situation in which people accurately anticipate the inflation rate. When people accurately anticipate the inflation rate, the natural rate of unemployment is %. On the previous graph, Place the black cross point to illustrate a situation in which people overestimate inflation by 3%. When people overestimate inflation, the resulting unemployment rate is the natural rate. True or False: The modern view of the Phillips curve indicates that to keep the unemployment rate low, policymakers should follow policies consistent with low and steady inflation.

Explanation / Answer

When people correctly anticipate the inflation rate, the difference between expected and actual rate of inflation is zero. The natural rate of unemployment corresponding this point is 5%.

When people overestimate the inflation rate by 3%, the natural rate of unemployment is 8%.

the modern view of phillips curve is that to keep the unemployment rate low, policymakers should follow policies consistent with low and stedady inflation. This is true. Also, people should be able to anticipate this rate accurately so that economy can operate at a natural rate of unemployment.

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