3. Phillips Cun-'e {15 points} Suppose the economy has the following Phillips Curve: 11: =1ItE2{uu\"'}:v Assume the natural rate of unemployment is 5%, there is no supply shock: and expectations are adaptive. 3.1 Suppose that ination over the past few years has been 4% and the economy is at its longrun equilibrium. Illustrate the Phillips Curve using the space below. You should clearly label the axes [in words and symbols}, natural rate of unemployment. Label Point A as the economy's longnin equilibrium point on your diagram. Label the intercept and slope of the Phillips Curve (your graph does not need to be to scale). [31 3 .2 The central banlt wants to achieve an ination rate target of 2% in the longrun. 1What type of policy would they need to implement: contractionary or expansionary"? Monetary or fiscal? [l] 3 .3 Suppose the central bank implements the policy mentioned in #32 and the ination rate falls to 3% in the short run. Using the Phillips curve equation given above, compute the unemployment rate that corresponds to this level of ination. Label this Point E on your diagram from #3.] [2.5] 3 .4 Assume that the central bank is successi'l in achieving its long-run ination target of 2%. Label the economy's longrun equilibrium assuming that the central bank. implements policies needed to achieve its ination target of 2%. Label this longrun equilibrium Point C and illustrate how the economy transitions to this point. Be sure to clearly label any new curves. intercepts and.-'or slopes. [2] 9