Show your work or no credit. Suppose the economy can be described by the following:

a. Suppose expectations are static. What are the equilibrium values of the inflation rate and the unemployment rate? What real interest rate does the Fed set? What is the equilibrium value of real output? solve for

b. Suppose instead expectations are adaptive; in the next period,t, . In the next period, what are the new equilibrium values of the inflation rate and the unemployment rate? What real interest rate does the Fed now set? What is the new equilibrium value of real output? solve for

Fed's target inflation rate = 3% initial expected inflation rate = 2% = 3/4 1. = 2% MPE = 0.6 A. = 4,800 1, = 30,000 X,8 = 10,000 u* = 5% Y* = 10,000 supply shocks = 0 B = 12 Fed's target inflation rate = 3% initial expected inflation rate = 2% = 3/4 1. = 2% MPE = 0.6 A. = 4,800 1, = 30,000 X,8 = 10,000 u* = 5% Y* = 10,000 supply shocks = 0 B = 12