3. Suppose that the Japanese economy is described by the following equations:

AD Y = 4000 + 2(M>P).

SRAS Y = Y + 100(P - Pe).

Okun's law (Y - Y)>Y = -2(u - u).

In this economy full-employment output Y equals in

$6000 billion (in constant 2010 US dollars) and the natural unemployment rate u equals 0.05.

a. Suppose that the nominal money supply has long been constant at M = 8000 and is expected by the public to remain constant forever. What are the equilibrium values of the price level, P, the expected price level, Pe, expected inflation, pe, output, Y, and the unemployment rate, u?

b. A totally unexpected increase in the money supply occurs, raising it from 8000 to 8800. 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?