Suppose inflation at time t is given by t = et + m + z - ut, and inflationary expectations are givenbyet =t-1+(1-),where01,andisaconstant.

Suppose inflation at time t is given by m = 11% + m + z out, and inflationary expectations are given by 11% = 6 nt-1+ (1-6) TE, where O s B s 1, and n is a constant. i. For what values of 6 do we obtain the original Phillips curve relation? ii. For what values of 9 do we obtain the new Phillips curve relation? Suppose the economy is initially at a medium-run equilibrium (defined by Y\v. If the central bank only cares about the inflation growth rate, how should it respond to the fiscal consolidation? vi. If the central bank only cares about the level of output, how should it respond to the scal consolidation? What happens to unemployment? vii. Suppose the central bank adjusts the real interest rate to return the economy to a medium-run equilibrium consistent with a zero output gap. How does the level of inflation compare to its level before the scal consolidation? Now suppose the value of 6 is consistent with the new Phillips curve relation. viii. Demonstrate the effect of a reduction in government expenditure on the IS curve and the PC in the short run. ix. Suppose the central bank adjusts the real interest rate to return the economy to a medium-run equilibrium consistent with a zero output gap. How does the level of inflation compare to its level before the scal consolidation? x. What will occur if the real interest rate corresponding to the zero lower bound is greater than the new natural rate of interest, rn'? Illustrate this situation using the ISLMPC model