ECON 3350 Exam III - Page 4 of 5 12/7/2021 2. (40 points) Suppose the central bank is bound by rules, and they have the objective function U = -571. (3) and the public have the same Expectations Augmented Phillips Curve for Output as before: yt = Un + a(m - E[T.]) + . (4) Furthermore, assume that or = 1.5, yn = 2.5, E[x] = 0, and c, = 0, as in the previous question. (a) (7 points) What is the equilibrium rate of inflation? Hints: 1. Inflation must be nonnegative (it can be zero or positive, but there cannot be deflation). 2. The equilibrium inflation rate can be achieved by taking the derivative of U with respect to m, setting it equal to zero, and solving for m/. 3. If you think it's WAY TOO EASY, then you probably have the right answer. (b) (8 points) What is the equilibrium rate of output? Hint: once you know inflation from part a, you can plug that into Equation 4 and get your answers