Consider Country A, where the Dynamic Aggregate Demand (DAD) is:

Yt=(/(1+Y))(t*)+(1/(1+Y))t

and the Dynamic Aggregate Supply (DAS) is

t = _t-1 + (Yt-)+vt

All the variables and parameters are as defined in class. The potential level of output and the central bank's target for the inflation rate are constant and the same in both countries, with *= 2%

The standard assumptions on the parameters hold: > 0 ; > 0; >0 ; >0 ; Y > 0.We know that all the parameters are the same in both countries, with the exception of Y which is : Country A Y =1 and country B Y = 0.25.

1)In the long run equilibrium of the economy, the output gap is

-Zero in both countries

-Positive in country A and negative in Country B

-Negative in both countries

-Positive in both countries

2)In the long run equilibrium of the economy, the inflation rate is

-2% in both countries

-2% in country A and higher than 2% in country B

-Higher than 2% in both countries

-2% in country B and higher than 2% in country A