One version of the Phillip's curve that we studied in the course is given by: ...

 

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One version of the Phillip's curve that we studied in the course is given by: π = π²b (u - u") + z Assume that b = 1, π = π-1 and 2 = 0, so the Phillip's curve (that you are going to use for this question) becomes: = Thật πt = In period 0, inflation is 2%, and the unemployment gap is zero. In period 1, the unemployment gap is still zero. In period 2, the central bank decides to reduce inflation, so monetary policy is tightened, and the unemployment gap becomes 2% in periods 2 and 3. From period 4 onwards, production is on the natural level. This information is summarized in the table below. a) fill in the (10) blanks using the Phillip's curve above. (8 points) Period, t 0 1 2 3 4 5 Te 2 0 0 2 2 0 0 ût 2 ㅠ b) Assume that inflation expectations were anchored at 2% rather than depending on past inflation. How would inflation and output respond to the central bank's decision in period 2 to tighten monetary policy? Fill in the (10) blanks in the table below. (8 points) c) In your view, and based on your results in a) and b), should the central bank have acted differently in any of the two cases above? (4 points) One version of the Phillip's curve that we studied in the course is given by: π = π²b (u - u") + z Assume that b = 1, π = π-1 and 2 = 0, so the Phillip's curve (that you are going to use for this question) becomes: = Thật πt = In period 0, inflation is 2%, and the unemployment gap is zero. In period 1, the unemployment gap is still zero. In period 2, the central bank decides to reduce inflation, so monetary policy is tightened, and the unemployment gap becomes 2% in periods 2 and 3. From period 4 onwards, production is on the natural level. This information is summarized in the table below. a) fill in the (10) blanks using the Phillip's curve above. (8 points) Period, t 0 1 2 3 4 5 Te 2 0 0 2 2 0 0 ût 2 ㅠ b) Assume that inflation expectations were anchored at 2% rather than depending on past inflation. How would inflation and output respond to the central bank's decision in period 2 to tighten monetary policy? Fill in the (10) blanks in the table below. (8 points) c) In your view, and based on your results in a) and b), should the central bank have acted differently in any of the two cases above? (4 points)