Y6

Suppose that the Phillips curve is given by Tit = 7 + 0.6*(5.5 - U.) , where it is the (actual) inflation in year t, 7 is the expected inflation in year t and Ut is the unemployment rate in year t, all measured in percentages. Note that this is a linear relationship between inflation and unemployment (straight line). In period t=1, the unemployment rate is equal to the natural rate of unemployment, and the expected inflation is equal to 1.8%. In period t=2, the authorities decide to bring the unemployment rate down to 4.6% and hold it there forever. In each year t, the expected inflation 7 is equal to the actual inflation in the previous year . t- 1 . What will the inflation rate be in period t=3