Suppose that the economy is currently operating at the efficient level of output and inflation is at the Fed's target. Next, suppose that two events occur: (i) inflation expectations decrease and (ii) the natural real interest rate decreases to r . Answer the following questions: (a) In the Phillips Curve diagrams, draw the results of these two events. Is inflation above or below the Fed's target now? Do we have an output gap? (b) What should the Fed do with its target nominal interest rate? How do they accomplish this? If inflation expectations remain lower than i*, can the Fed hit its targets for either the output gap or inflation? Explain and show on the two diagrams. Suppose that the economy is currently operating at the efficient level of output and inflation is at the Fed's target. Next, suppose that two events occur: (i) inflation expectations decrease and (ii) the natural real interest rate decreases to r . Answer the following questions: (a) In the Phillips Curve diagrams, draw the results of these two events. Is inflation above or below the Fed's target now? Do we have an output gap? (b) What should the Fed do with its target nominal interest rate? How do they accomplish this? If inflation expectations remain lower than i*, can the Fed hit its targets for either the output gap or inflation? Explain and show on the two diagrams