Use the following macro model to answer the questions below. Write your answers on separate sheets of paper and submit in class.

g_y,t= g_m,t - _t

_{t t}^e= u_n u_t

u_t u_t-1 = -0.5 (g_y,t gn)

1) Use the values gn=3% and un=6% Find the medium run values of gy,t and ut . If gm,t =4 % initially, what is the medium run value of _t ? Starting from the initial medium run values for u_t-1 and _t^e , if the Fed lowers g_m,t to 3%, find the one period (short run) change in unemployment, inflation and the growth rate of output. Also find the new medium run value of inflation. Draw graph of the Phillips curve showing the changes, labeling the values of unemployment and inflation. What is the sacrifice ratio?

2) Use the values gn=3% and un=6% Find the medium run values of g_y,t and ut . If g_m,t= 5% initially, what is the medium run value of t ? Starting from the initial medium run values for ut-1 and e t , if the Fed raises gm,t to 6%, find the one period (short run) change in unemployment, inflation and the growth rate of output. Also find the new medium run value of inflation. Draw graph of the Phillips curve showing the changes, labeling the values of unemployment and inflation