Inflation Rate (n) 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 90,000 91,000 92,000 93,000 94,000 95,000 000'96 97,000 98,000 99,000 100,000 101,000 102,000 103,000 104,000 105,000 106,000 Real GDP (Y) The graph above shows the goods market condition in a country. Currently the Fed is NOT following an inflation targeting policy. The inflation rate is 1 = 5.00 percent and the potential GDP equals Yp = 100,000. Marginal propensity to consume is MPC = 0.75. Okun's alpha equals 2. Currently the economy is in the state of long-run equilibrium . Now, the Fed decides to follow and inflation targeting policy and decides on an inflation target of I1* = 0.50 percent. This policy will cause the inflation rate in the short run to decrease to percent and the cyclical unemployment in the short run to increase to percent. Inflation Rate (n) 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 90,000 91,000 92,000 93,000 94,000 95,000 000'96 97,000 98,000 99,000 100,000 101,000 102,000 103,000 104,000 105,000 106,000 Real GDP (Y) The graph above shows the goods market condition in a country. Currently the Fed is NOT following an inflation targeting policy. The inflation rate is 1 = 5.00 percent and the potential GDP equals Yp = 100,000. Marginal propensity to consume is MPC = 0.75. Okun's alpha equals 2. Currently the economy is in the state of long-run equilibrium . Now, the Fed decides to follow and inflation targeting policy and decides on an inflation target of I1* = 0.50 percent. This policy will cause the inflation rate in the short run to decrease to percent and the cyclical unemployment in the short run to increase to percent