1. Consider the following model of a closed economy where y, p, and m are the natural logarithms of output, price level, and money supply respectively. E is the expectations operator and is a random disturbance term ( ~ N (0, 2))). Equation (1) is a variant of the Phillips curve, equation (2) is a money demand function, and equation (3) is the authorities money supply rule.

yt = 20 + 0.25 (pt- Et-1pt) (1)

yt = 30 + 0.25 (mt- pt) (2)

mt = 5 + t (3)

1. i. Solve for the full employment equilibrium value of y and the expected price level.
2. ii. If t = -2, what is the price level and the output level?

[15 marks]