An economy has the following equation for the Phillips curve:

= E 0.3(u 4)

People form expectations of inflation by taking a weighted average of the previous two years of inflation:

E = 0.71 + 0.32

Okun's Law for this economy is:

Y Y1 /Y-1 = 3.00.5(uu1)

In the year of 2019, the economy was at its natural level of unemployment with a stable

inflation rate of 4 percent.

(a)Compute the natural rate of unemployment for 2019.

(b)Graph the short-run trade-off between inflation and unemployment that this economy faced in 2019. Label the point where the economy begins as point A.

(c)Assume that in 2020 as a result of a shutdown, the unemployment rate suddenly grew by 5 percentage points. What will the new inflation rate be?

(d)Compute the economy's sacrifice ratio going from 2019 to 2020. Briefly state the meaning of the sacrifice ratio you calculated.

(e)Now assume that in 2021, the unemployment rate fell back to its natural level. Com- pute the new inflation rate, expected inflation rate and the output growth rate.

(f)Use the graph from part (b) to show the transition of the economy from 2019 to 2020, and from 2020 to 2021. You can label the transition points as B and C respectively. Be sure to numerically label your graph.