Assume that the country of Zeetoland is in short-run equilibrium. The expected inflation rate is 4 percent, the actual rate of unemployment is 8 percent, the natural rate of unemployment is 6 percent, and the equilibrium real interest rate is 3 percent.

(b) Assume no policy action is taken to address the output gap in Zeetoland. Explain how the economy will adjust to full employment in the long run.

(c) Assume instead that the central bank is concerned about the buildup of inflationary pressures in Zeetoland and is considering taking action to fight inflation. Assuming the banking system in Zeetoland has ample reserves, identify one monetary policy action the central bank would likely take.

(d) Assume instead, that Zeetoland had limited reserves. Identify one monetary policy action the central bank would likely take.