. Assume that the rate of inflation is given by the following equation:= -0.4(u-uⁿ) +-1, whereuⁿ=5.0%.

a. Suppose that the inflation rate has been 10% for the last several years and that the government decides to undertake contractionary fiscal and monetary policy starting in Year 1. If the unemployment rate in Year 1 is 10%, what is the inflation rate in Year 1?

b. Suppose the unemployment rate remains at 10% from Year 1 to Year 3. What is the inflation rate in each year?

c. Graph the Phillips curves for the three years, showing clearly the shifts in the Phillips curve and indicating where each Phillips curve intersects the vertical line at the natural rate of unemployment. (You can put all the Phillips curves on the same graph.).

d. Calculate the sacrifice ratio for the economy. (Assume that every one percentage point rise in the unemployment rate reduces real GDP by 2%.)

e. Briefly explain why the magnitude of the sacrifice ratio would be important to a policy-maker considering taking steps to reduce inflation.