Business Cycle. Consider the expectation augmented Philips curve. If people form inflation expectation in the following adaptive way: ??-1??=0.5**(??-2+??-1)(a) ?Write the Philips Curve function in the short-run and in the long-run. (b) ?Draw the short-run PC and the long-run PC curves in the inflation, output gap space. Label the level of inflation and the level of output gap at the intersection. point. (c) ?Use the AD-AS diagram to illustrate short run economic fluctuations after a negative aggregate demand shock.

3. Business Cycle. Consider the expectation augmented Philips curve. If people form inflation expectation in the following adaptive way: EL-Int = 0.5 * (71-2+ #t-1) (a) Write the Philips Curve function in the short-run and in the long-run. (b) Draw the short-run PC and the long-run PC curves in the inflation, output gap space. Label the level of inflation and the level of output gap at the intersection point. (c) Use the AD-AS diagram to illustrate short run economic fluctuations after a negative aggregate demand shock