1. 3. An economy is described by the following equations:

AD SRAS Okun's law (Y − ¯¯¯

Y = 4000+2(M/P).

Y = ¯¯¯ Y+100(P −Pe

).

Y )/¯¯¯

Y = −2(u−¯ u).

In this economy full-employment output

¯¯¯

Y natural unemployment rate equals 0.05.

u

¯

equals 6000 and the

a. Suppose that the nominal money supply has long been constant at M=4000 and is expected by the public to remain constant forever. What are the equilibrium values of the price level, , the expected price level, P expected inflation,

πe Pe

,

, output, , and the unemployment Y

rate, ?

u

b. A totally unexpected increase in the money supply occurs, raising it from 4000 to 4488. What are the short run equilibrium values of the price level, expected price level, output, and unemployment rate? What are the values of cyclical unemployment and unanticipated inflation?

c. What is the slope of the expectations-augmented Phillips curve (equal to

−h in Eq. 12.1 ) in this economy?

