Consider following Philips Curve.
∆πt = ¯ν ˜Yt + ¯o
a. Draw Philips curve. (x-axis: ˜Yt, y-axis: ∆π) What is the slope and y-intercept of the curve?
b. What is the impact of the ¯ν change? Should government perform a more aggressive policy to stabilize the inflation rate with high ¯ν or low ¯ν? If so, why?
c. Suppose there is an inflation shock because a war increased oil prices. (¯o>0) What is the impact of the oil price shock? (Use Philips curve graph)
