Question: Assume n = = 0Tt-1, and suppose that is initially equal to 0. Suppose that the rate of unemployment is initially equal to the

Assume n = = 0Tt-1, and suppose that is initially equal to

 

Assume n = = 0Tt-1, and suppose that is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 4% and hold it there forever. b. Determine the rate of inflation in years t, t+1, t+2, and t + 5. Do you believe the answer given in (b)? Why or why not? c. (Hint: Think about how people are likely to form expectations of inflation.)

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