Question: Suppose that the private sector does not have rational expectations, but instead follows an adaptive expectations scheme. That is, the private sectors expected inflation rate

Suppose that the private sector does not have rational expectations, but instead follows an adaptive expectations scheme. That is, the private sectors expected inflation rate is what the inflation rate was last period. Show in a diagram how the inflation rate and output move over time if the initial inflation rate is the optimal rate i*, and then the central bank acts to exploit the Phillips curve. Explain your results.

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