Consider two quarterly the unemployment rate (UNEMPt) and the inflation rate (INFt) that are both integrated of order one (I (1)). a. Formulate a bivariate VAR (2) model for these variables. b. Suppose that the unemployment rate and the inflation rate are cointegrated. Describe in detail how you would modify this VAR model to a Vector Error Correction (VEC) model and explain the significance of the error correction term. (hint: write down the complete steps to formulate the Vector Error Correction Model (VECM)) c. In the context of this model, what would be the implications of finding a significant error correction term in the VEC model for the long-run relationship between the unemployment rate and the inflation rate? d. Assume you have the following error terms for your VAR (1) model,

UNEMP = 0.5 + 0.8UNEMP+-1 + 0.1INF+-1 + CUNEMPt INF- = 1.0 + 0.2UNEMP+-1+ 0.9INF+-1 + CINFt