Country A has the following Philips Curve:

= 0.5 (0.06)

a) What is the natural rate of unemployment for Country A?

b) Graph the short-run and long-run relationship between inflation and

unemployment.

c) Assume that the social cost of unemployment and inflation is described by the

following loss function:

= + 0.05!

The central bank would like to minimize this loss. Calculate the optimal level

of inflation that minimizes this loss function.

d) i) Define the sacrifice ratio.

ii) Assume that the inflation rate in both country A and country B is higher

than the optimal inflation rate you obtained in part c). The public in country A

believes that their policymakers are committed to targeting the optimal

inflation rate you obtained in part c), while the public in country B is skeptical

about their policymakers' intention to reduce inflation and achieve the optimal

inflation rate. According to the rational-expectations approach, the sacrifice

ratio will be lower in country A than in country B. Explain why this might be

true.