The effects of a permanent decrease in the rate of nominal

money growth

Suppose that the economy can be described by the following

three equations:

ut - ut-1 = -0.41gyt - 3%2 Okun's law

pt - pt-1 = -1ut - 5%2 Phillips curve

gyt = gmt - pt Aggregate demand

a. Reduce the three equations to two by substituting gyt from

the aggregate demand equation into Okun's law. (Okun's

law was presented in Chapter 2.)

Assume initially that ut = ut-1 = 5%, gmt = 13%, and

pt = 10%.