Answer the following questions, using appropriate diagrams to help explain your answers where necessary. Remember to correctly cite and reference any sources that you use although researched answers are not required and it is preferable to write from your understanding of the course material as you would have to do in a traditional exam. (a) Suppose that an economy is operating with 25% inflationand 3% unemployment(which we will assume is consistent with full-employment output) and that the monetary authorities decide to act to get inflation under control. Outline what will happen if we assume an expectations-augmented Phillipscurvein unemployment-inflationspace.

(b) A set of Phillipscurves in output-inflationspace can be defined as:

p = p_-1+ a(y-y_e) or, more explicitly including a subscript for the time period as:

p_t = p _{t -1}+ a(y-y_e). Draw a set of such Phillipscurves for a=2 and explain what the parametera tells us about how an economy would respond to tight monetary policy.