ECON 202: Tutorial Assignment 7, 2010 To be discussed in tutorials in the week beginning Monday 27 th September. This assignment WILL BE GRADED . Hand in your written answers to your tutor’s box by 10.30 am Monday 27 th September. Variables are as defined in Blanchard, and as used in lectures. Question 1 (5 marks) π t - t-1 = - α (u t - u n ) if e t = t-1 u t - u t-1 = - β (- yt g y g ) = - t yt g mt g Using the above equations, suppose = 12% , u n = 4%, = 1, y g = 2%, = 0.5. Assume in year 0 that u = 4% and that the Central Bank decides that it will begin disinflation in year 1 to reduce inflation to 3%. Assume that the desired path of inflation is: inflation starts at 12% in year 0 (before the change in monetary policy) and decreases 3% a year until it reaches 3%. (a) Given this information, construct a table similar to Table 9-1 in Blanchard. Include in your table for years 0 to 5 the values of inflation, unemployment, output growth, nominal money growth, and real money growth.
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