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2. Inflation with and without a Pandemic. The previous question assumed that inflation is perfectly forecasted. Use all the previous information given, but now assume that expected inflation is formed according to: The = (1-0)n + Ont-1 where 0 = 0.5, it = 0.04, and nit-1 = 0.03 = 3%. Assume that the pre-pandemic period is t-1, the pandemic period is t, and the post- pandemic period is t+1. Furthermore, recall that the Phillips Curve for any time period t, is given by The = me + (m + z) - aut, or you can use the Phillips Curve for changes in inflation. a) Calculate what the inflation rate at t ( ) would have been if the pandemic had not occurred at t. Would this inflation rate be different with respect to the inflation rate given for the previous period (Tit-1)? (4 points) b) During the pandemic, economists predicted inflation using the model given above for me. Calculate the actual inflation rate at t during the pandemic and explain why this result differs from (a). (4 points)c) When economists calculated the actual inflation at t, they found it was 0%. They concluded that people changed their constant beliefs about future inflation (7) as a result of the enormous fiscal stimulus injected by the government. Using this model, can economists solve backwards to recover this parameter? If so, calculate the new it, if not, explain what is missing. (4 point) d) Using the fact that actual inflation at t was 0%, now assume that the actual unemployment rate rapidly converged to the natural rate of unemployment at t+1. Calculate what the actual inflation rate at t+1 (nt+1) would be if the pandemic occurred. And calculate what the inflation rate would have been at t+1 had the pandemic not occurred. (4 points)e) Plot the empirical relationship between inflation () and unemployment (u) using only two data points: t-1 and t under both scenarios (pandemic and non-pandemic economy). Does the tradeoff between inflation and unemployment always hold? Explain briefly. (4 points) PC with Pandemic PC without a Pandemic