4. Suppose that the Turkish economy in long-run equilibrium has an inflation rate, p, of 12% (0.12) per year and a natural unemployment rate, u, of 8% (0.08). The expectations-augmented Phillips curve is p = pe - 2(u - u).

Assume that Okun’s law holds so that a 1 percentage point increase in the cyclical unemployment rate maintained for one year reduces GDP by 2% of fullemployment output.

a. Consider a two-year disinflation. In the first year p = 0.06 and pe = 0.1. In the second year p = 0.06 and pe = 0.06. In the first year, what is the unemployment rate? By what percentage does output fall short of full-employment output? In the second year, what is the unemployment rate?

By what percentage does output fall short of fullemployment output? What is the sacrifice ratio for this disinflation?

b. Now consider a four-year disinflation according to the following table:

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Year 1 2 3 4 0.08 0.04 0.04 0.04 0.10 0.08 0.06 0.04