Consider an economy in long-run equilibrium with an inflation rate n of 12% (0.12) per year and a natural unemployment rate u of 6% (0.06). The expectations-augmented Phillips curve is

Assume that Okun's law holds so that a 1 percentage point increase in the unemployment rate maintained for one year reduces GDP by 2.0% of full-employment output.
a. Consider a two-year disinflation. In the first year, π = 0.04 and πe = 0.08. In the second year, π = 0.04 and πe = 0.04. In the first year, what is the unemployment rate? By what percentage does output fall short of full-employment output? In the second year, what is the unemployment rate? By what percentage does output fall short of full-employment output?
b. Now consider a four-year disinflation according to the following table:

What is the unemployment rate in each of the four years? By what percentage does output fall short of full-employment output each year? What is the sacrifice ratio for this disinflation?

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