An economy has the given equation for the Phillips curve:

=E0.75(u5)=E0.75(u5)

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

E=0.61+0.42E=0.61+0.42

Okuns law for this economy is:

YY1Y1=2.02.5(uu1)YY1Y1=2.02.5(uu1)

The economy begins at its natural rate of unemployment with a stable inflation rate of 8 percent.

e. Comparing the equilibrium before the recession with the new long-run (period six) equilibrium, how much does inflation change?

Inflation decreases by ___________ percentage points.

How many percentage points of output are lost during the transition? ________________ percentage points of output are lost.

What is this economys sacrifice ratio? ________________The sacrifice ratio equals