Y6

4. (Computational analysis) Consider the Phillips curve Tit = Tit - E(ut - 2* ) with e = 1.2, u* = 0.05, and of = 0.08. Suppose that wo = u*. (a) Suppose that policy makers wish to lower unemployment. They are willing increase inflation to 10% for year t, what unemployment rate will result from the inflation target? (b) Suppose that the public has fixed expectations and that policy makers continue to target = 10%. Determine the implied rate of unemployment in years t+1, t+2, and t+3. (c) Explain why this expectations formula is unlikely to remain true. (d) Suppose that in year t+4 public switches to employ simple adaptive expectations. Policy makers maintain the new lower unemployment rate. What inflation targets do they need to set for years t+4, t+5, and t+6? (e) Is it possible for the policy makers to sustain low unemployment along with a 10% inflation rate