Question III [total: 15 points) Suppose that inflation at time t is given by the following equation: 1, = x + 7 + , where all the variables are the same as in the lectures. However, unlike in lectures, assume that T = 0.02. That is, people expect the inflation rate to equal 2% in every period. (a) (10 points) Using a version of the Phillips curve with (111 14) on the vertical axis and a graph showing how inflation responds over time, analyze the effect of a one time price shock to the economy. (b) (5 points) The Bank of Canada has a specific mandate to keep inflation around 2%. Given your answer to part a) and our discussion in class, explain the importance that this mandate is a credible commitment. Question III [total: 15 points) Suppose that inflation at time t is given by the following equation: 1, = x + 7 + , where all the variables are the same as in the lectures. However, unlike in lectures, assume that T = 0.02. That is, people expect the inflation rate to equal 2% in every period. (a) (10 points) Using a version of the Phillips curve with (111 14) on the vertical axis and a graph showing how inflation responds over time, analyze the effect of a one time price shock to the economy. (b) (5 points) The Bank of Canada has a specific mandate to keep inflation around 2%. Given your answer to part a) and our discussion in class, explain the importance that this mandate is a credible commitment