. Consider the following 3-equation model: EbT Y=1MwB+ 1_b (@ r03 = 4 +1.5(7r 7H) + 0.5(Y Y*) 7r 2 7T6 + 0.5(Y Y*) where Y is output, 7r is inflation, we 2 7r* 2 2, and Y* = 100. U'l-P vv Expected inflation is we, and Y Y* is the output gap. The variable r03 is the interest rate set by the central bank. We may interpret 7r* as the central bank's inflation target. Government expenditure, 5, and net taxes, T, are both given and set by the government