Question III [total: 15 points] Suppose that inflation at time f is given by the following equation: M=n+VY+0, where all the variables are the same as in the lectures. However, unlike in lectures, assume that = 0.02. That is, people expect the inflation rate to equal 2% in every period. (a) (10 points) Using a version of the Phillips curve with (m, - a? ) on the vertical axis and a graph showing how inflation responds over time, analyze the effect of a one time price shock to the economy. (b) (5 points) The Bank of Canada has a specific mandate to keep inflation around 2%. Given your answer to part a) and our discussion in class, explain the importance that this mandate is a credible commitment