An economy is represented by the following three equations:

The Beta in Okun’s law is 0.5

The alpha in the Philips curve is 1.

The natural rate of growth g_n is 3%.

The Natural Unemployment rate U_n is 5%

The policy instrument is money growth g_mt.

The Economy is at its medium-run equilibrium with inflation at 8%.

Q. What is the current growth rate of the Money Supply,?

Given the above conditions if the Central Bank decides to follow a disinflation strategy and bring its level down from 8% to 5% over a period of 3 years then stabilize the economy.

Q. What will happen to Unemployment, Inflation, and Money Growth in the next few years?

Q. Define a point year of excess unemployment and the sacrifice ratio.

Q. What is the sacrifice ratio for this economy?

Q. What rate of growth would lead to a decrease in the unemployment rate of 1% per year?

Show the details of the solution and fill the table below with the equilibrium values for every year until the economy stabilizes at the new targeted inflation rate.

	T0	T1	T2	T3	T4	T5	T6
gmt
gyt
Ut-1
Ut
Start Period πt−1πt−1
End Period πtπt

gyt = 9mt UtUt-1- ut t Tt-1-a - t -B (gyt - gn) (ut - Un)