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Please help me with this problem in 40 minutes Thank you Question 5. Inflation and Unemployment [20 Marks] The expectations-augmented Philips curve equation is given

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Please help me with this problem in 40 minutes

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Question 5. Inflation and Unemployment [20 Marks] The expectations-augmented Philips curve equation is given by IT = Te - 4(u - u). (a) Draw a diagram showing the long-run Philips curve and short-run Philips curves that contain the following points. Suppose the unemployment rate u at point A is 5%. Label points A, B, C, D and E in your diagram. [10 marks] (b) There are some major costs of inflation. Describe them, being sure to distinguish between anticipated and unanticipated inflation? [4 marks] (c) Suppose expected inflation in the economy is 2%. Banks set nominal interest rate so that they can earn a 1% expected real return. Companies set nominal wages based on a 2% expected real wage increase. Calculate the actual real interest rate and the percentage increase in the real wage if the actual inflation rate is 3%. [6 marks]

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