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Suppose aggregate supply in the United Kingdom is Y = Y* + 50(m - 1 ), where Y denotes output, Y* denotes potential output, *

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Suppose aggregate supply in the United Kingdom is Y = Y* + 50(m - 1 ), where Y denotes output, Y* denotes potential output, * denotes the inflation rate and * denotes the expected rate of inflation. Also Y - Y* = -10(u - u*), where u denotes the unemployment rate and u* denotes the equilibrium (or natural) rate of unemployment. (a) Find the expectations augmented short-run Phillips curve for this economy and sketch it in a diagram, explaining its shape. Add the long-run Phillips curve to your diagram and explain its shape. (b) The Bank of England has an inflation target of 2 per cent. However, inflation in the UK has been below target at 1 per cent due to the economic effects of the coronavirus pandemic. Analyse the effects on unemployment, output and inflation in the short-run and long-run if: (i) the inflation target is credible (ii) expectations are adaptive, 50 m = 1-1. (c) Suppose the inflation rate is on target at 2 per cent. However, it is a widely held belief that the United Kingdom's departure from the European Union (known as 'Brexit') will increase the inflation rate through higher import prices. Could such a belief be self-fulfilling? (d) "The specific inflation target does not matter, provided it is credible." Do you agree with this statement? Explain why, or why not

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