Phillips Curve, Inflation, and unemployment. Central bank action to reduce inflation. a,b,c,d,e.

3. [Phillips Curve] Inflation and unemployment have been steady in CMC for the past 5 years and individuals have adaptive expectations. A new central bank chair has recently been appointed and asks for your advice on how to reduce inflation and what the potential impacts are. a. Describe what action the central bank should take in order reduce inflation. (Note: Keep in mind what variables the central bank directly controls. I (4 pts) . Assuming the economy was in long run equilibrium before your policy recommendation, show the short-run impact of your recommendation using the Phillips curve. Label the original equilibrium as \"0\" and the new SR equilibrium as \"SR." (Note: plot the original equilibrium as well as the new equilibrium under your policy. ] (7 pts) 0n the same graph as part (b) show the long-run impact of your policy recommendation. Label the new LR equilibrium as "LR." Briefly describe what causes the transition from the SR to the LR. (7 pts) . Summarize the change in the following variables relative to the initial equilibrium before your policy recommendation. Indicate whether each variable rises (T), falls (l), or stays constant (H). (4 pts) Variable Output (Y) Unemployment (u) Real money balances (M/P e. Do the dynamics of your proposal (the transition from the SR to the LR) differ if individuals have rational expectations rather than adaptive expectations? Explain BRIEFLY. {3 pts)