Give a definition for the following terms using graphs and/or equations when necessary.

(i)Adaptive Expectations

(ii)Cost-Push Inflation

(iii)Indicate whether the following statement is true, false, or uncertain and explain your answer.The imperfectinformation model explains the downward slope of the Philips Curve.

(15marks total)

(b)Suppose the Phillips curve is given by = ₁ 0.5( ) and that the natural rate of unemployment is given by =

0.5(₁ + ₂ ), the average of the past two years' unemployment.

(i)Explain why the natural rate of unemployment might depend on recent unemployment.

(ii)Suppose the BoE implements a policy to permanently reduce the inflation rate by one percentage point.What effect will this policy have on the unemployment rate over time?

(iii)Define the sacrifice ratio.What is the value of the sacrifice ratio in this economy?Explain.

What do the equations in this problem imply about the short-run and long-run trade-offs between inflation and unemployment?