Neco 2020 Economics Question 5
Practice objective / multiple choice question 5 from the 2020 Neco Economics examination.
The short‑run Phillips curve of an economy is \(\pi_t = \pi_{t-1} - 0.5\bigl(u_t - 0.06\bigr)\), where \(\pi_t\) is the inflation rate, \(u_t\) the unemployment rate and 6 % is the natural rate of unemployment. In year \(t-1\) inflation was 8 % and unemployment 5 %. The central bank announces a credible policy expected to raise unemployment to 7 % in year \(t\).\n\n(a) Compute the expected inflation rate for year \(t\).\n(b) If the nominal interest rate set for year \(t\) is 10 %, calculate the expected real interest rate using the Fisher equation.\n(c) Briefly comment on whether the policy is likely to have a contractionary effect on output.
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About This Question
This is Neco 2020 Economics Question 5. It is one of the objective questions from the 2020 Neco Economics examination.
Difficulty level: Medium .
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