1. (a)Calculate inflation in periods 1 to 5.
2. (b)Illustrate the results with a Phillips curve diagram. Draw the Phillips curves for each period and indicate the level of production and inflation in each period! (Note that the position of the Phillips curve depends on what inflation was in the previous period.)

Q3. Cutting inflation. Assume that B=1, It = 1, and z=0, so the Phillips curve is In period 0, inflation is 6%, and the output gap is zero. In period 1 the output gap is still zero. In period 2, the central bank decides to reduce inflation so monetary policy is tightened and the output gap becomes minus 2% in periods 2 and 3. From period 4 onwards, production is on the natural level