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June 02 , 2010

Okun’s law and Unemployment Inflation Trade off


"This problem uses Okun’s law to study 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)  Compute the unemployment rate for each of the 10 time periods.
b) When and why were the inflation and unemployment rates negatively correlated?  When and why were the inflation and unemployment rates positively correlated?
c) Explain why there is no long-run unemployment-inflation tradeoff.

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