1.Suppose that for a given economy:

the Phillips Curve is given by

expected inflation is given by

is initially equal to zero.

is given and does not change;it could be zero or any positive value.

the rate of unemployment is initially equal to the natural rate.

(a)Calculate the natural rate of unemployment.[Hint:what must be true at the natural rate?]

In year t the authorities decide to bring the unemployment rate down to 3% and hold it there for ever.

(b)Determine the rate of inflation in periods t+1, t+2, t+3, t+4 and t+5.How does compare with ?

(c)Does the answer in (b) seem plausible?Why, or why not?[Hint: Think about how people are likely to form expectations of inflation.]