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Phillips Curve: a) If the
equation for a country’s Phillips curve is π = 0.03 – 0.25(u –
0.05), where π is the rate of inflation and u is the unemployment
rate, what is the short-run inflation rate when unemployment is 4
percent (0.04)?

b)Assume that an economy has the Phillips curve π = π –1 –
0.25(u – 0.05). How many percentage point-years of cyclical
unemployment are needed to reduce inflation by 5 percentage
points?

c) Describe the difference in assumptions between Adaptive
Expectations and Rational Expectation? How does this difference
impact the Federal Reserve Bank’s ability to reduce inflation?