(a)Apply Mankiw's Sticky-Price Theory to answer the following question. According to thattheory, some firms follow the sticky-price rule due to "menu cost," while others accept flexiblemarket prices. Supposethat the RBNZincreases the OfficialCash Rate (OCR)sharply andunexpectedly to lower the inflation rate without creating much unemployment in the short run.

How does the effectiveness of this policy depend on the proportions of sticky-price firms in the macroeconomy?

(b)"Between 1987 and 1992, the New Zealand economy witnessed a swift drop in the inflation rate by more than 15 percentage points while the unemployment rate increased from