Write the equation for the Phillips curve (PC) with anchored expectations Use output instead of the unemployment rate Now suppose that the economy begins with Y Y and inflation equal to the central bank's target, a Assume that central bank policy is to chosen the real interest rate, which is safely above its lower bound throughout this problem (Ill) Assume that there is a permanent fall in government purchases Illustrate the effect of this policy change In an IS LM PC diagram, using your Phillips curve from part (a) What happens to output, investment, and the inflation rate How must the central bank respond to the situation described in part (b) to restore Y and n ft Answer in words, no diagram for this part

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Question: Write the equation for the Phillips curve (PC) with anchored expectations. Use output instead of the unemployment rate Now suppose that the economy begins with

Write the equation for the Phillips curve (PC) with anchored expectations. Use output instead of the unemployment rate

Now suppose that the economy begins with Y = Y and inflation equal to the central bank's target, a. Assume that central bank policy is to chosen the real interest rate, which is safely above its lower bound throughout this problem (Ill).

Assume that there is a permanent fall in government purchases. Illustrate the effect of this policy change In an IS-LM-PC diagram, using your Phillips curve from part (a). What happens to output, investment, and the inflation rate?
How must the central bank respond to the situation described in part (b) to restore Y and n = ft? Answer in words, no diagram for this part.

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