Okun's law and unemployment inflation trade off.
This problem uses Okun's law to study explain how the unemployment and inflation rates change when there are demand shocks. Assume that the relationship between the output ratio and the unemployment rate, U is given by the equation U = 6.0 - 0.5 (output ration -100).
a) Calculate the unemployment rate for each of the 10 time periods.
| Time period |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
| x |
5.0 |
6.0 |
5.5 |
4.8 |
4.4 |
3.1 |
2.6 |
2.8 |
3.0 |
3.2 |
b) When and why were the inflation and unemployment rates negatively correlated? When and why were the inflation and unemployment rates positively correlated? c) Elucidate why there is no long-run unemployment-inflation trade