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3. Suppose that the economy can be described by the following three equations: Okun's law: ut ut1 = 0.4(gyt 4%) Phillips curve: t t1 = (ut 5%) Aggregate demand: gyt = gmt t Reduce the three equations to two by substituting gyt from the aggregate demand equation into Okun's law. This will leave the Phillips curve: and the new equation:

A. ut ut1 = 0.4(gyt 4%)

B. ut ut1 = 0.4(t=t=1 4%)

C. ut ut1 = 0.4(gyt 0.4)

D. ut ut1 = 0.4(gmt 4%) E. ut ut1 = 0.4(gmt=t 4%) t t1 = (ut 5%)

4. In the above economy in question 3, assume initially that ut = ut1 = 5%, gmt = 14%, and t = 10% The statement ination is always and everywhere a monetary phenomenon:

A. is consistent with the given values because the growth rate of money equals the rate of ination even when the unemployment rate is stable at its natural rate.

B. is consistent with the given values because the growth rate of money does not equal the rate of ination even when the unemployment rate is stable at its natural rate.

C. is not consistent with the given values because with unemployment at its natural rate, the growth rate of money is equal to ination plus output growth. Ination is created by having money grow at a rate higher than output growth.

D. is not consistent with the given values because the growth rate of money does not equal the rate of ination even when the unemployment rate is stable at its natural rate.

E. is consistent with the given values because with unemployment at its natural rate, the growth rate of money is equal to ination plus output growth. Ination is created by having money grow at a rate higher than output growth.