What Would Be The Likely Impact On The Phillips Curve If A Country's Central Bank Were To Implement A Monetary Policy Rule That Incorporates A Taylor-type Reaction Function With A Relatively High Coefficient On The Output Gap, While Simultaneously Experiencing A Significant Increase In Its Labor Market's Natural Rate Of Unemployment Due To Demographic Changes?

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The implementation of a Taylor-type reaction function with a high coefficient on the output gap by the central bank, coupled with a significant increase in the natural rate of unemployment due to demographic changes, would have the following impacts on the Phillips Curve:

  1. Shift to the Right: The Phillips Curve will shift to the right. This occurs because an increase in the natural rate of unemployment (U_n) means that the economy can sustain a higher unemployment rate without triggering inflation. Consequently, at any given unemployment rate, the associated inflation rate will be lower compared to the previous natural rate.

  2. Flattening of the Slope: The slope of the Phillips Curve may become flatter. This is due to the central bank's aggressive response to output gaps, which can stabilize inflation more effectively. A flatter curve implies that changes in unemployment have a less pronounced effect on inflation, as the central bank's actions mitigate the trade-off between unemployment and inflation.

In summary, the Phillips Curve will experience a rightward shift and may exhibit a flatter slope, reflecting both the demographic-driven increase in natural unemployment and the central bank's proactive monetary policy.