Philips Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 points Consider an economy that begins with inflation rate of 4%. The Federal Reserve is concerned that the inflation rate is too high and wants to get it back to a "target" of 1%. It does this by moving the economy along the Philips curve. According to the Federal Reserve's economists, the curve has the following equation = 1 3 Y The Federal Reserve is considering two options 1. Going cold turkey and achieving its target in the first year. 2. Gradually decreasing inflation by 1% every year for three years. (a) (4 points) Write down the time-line of output gaps and inflation rates for each of the two options over the relevant time periods. (b) (4 points) Calculate the cyclical unemployment associated with each option for each year. (c) (2 points) Discuss the pros and cons of the two options, and what factors might influence the choice.