Two econ doubts.

[X]

DSE paper 2007 Q8

Why increase in interest rate will always reduce borrowing? I can't understand this argument!

DSE paper 2006 Q44

Question says, "Phillips curve shifts." Doesn't it imply that natural rate of unemployment changed?!

[Gayyam]

Sorry, I was wrong earlier! The natural rate of unemployment increases, and the long run Phillip's curve shifts outward.
Now to understand the effect of wanting to keep the previous rate of unemployment, refer to the following figure -


If you are initially at point B (which is the initial natural rate of unemployment - U2), then a supply shock shifts the natural rate of unemployment outward at U1, then you move along the short run Phillip's curve to arrive at point A.
Now, any forcible attempts to decrease the unemployment rate below U1 to U2 (say, by increading the government spending), will result in the economy being back at point B along the short run Phillip's curve. Now, due to inflationary expectations, the economy will move to point C, at the same U1, but with higher inflation.

[X]

OK! will you please let me know how natural rate of unemployment is unaffected?

[Dreyfus]

For q8...u can use slutsky decomposition.....