Suppose that an economy has the Phillips Curve

=^e 0.5(u0.06)

We will assume that expected inflation (^e )follows adaptive expectations and that inflation has been running at 10% over the last year.

(a) Answer these questions in the boxes below, respectively:

i) what is the natural rate of unemployment?

ii) What is expected inflation?

iii) How much cyclical unemployment is necessary to reduce inflation by 5 percentage points?

iv) Using Okun's rule, compute the sacrifice ratio (SR). (Hint: Assume an Okun's rule coefficient of 2).

B.Based on your answers to part (a) and that inflation is running at 10 percent. The Central Bank wants to reduce it to 5 percent. Briefly, give two scenarios that could achieve that goal.