Econ 204 10 points vamsi v. assignment 3 i. philips curve 5 points

Econ 204 10 points Vamsi V. Assignment 3 I. Philips Curve 5 points Suppose that the Philips curve is given by?t = ?et + 0.1 -2uta. What is the natural rate of unemployment?b. Assume ?et = ??t-1and suppose that ? is equal to 0. Suppose that the rate of unemployment is initially equal to thenatural rate. In Year t, the authorities decide to bring the unemployment rate down to 3% andhold it there forever. Determine the rate of inflation in years t, t+1, t+2, and t+5.c. Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people arelikely to form expectations of inflation.)Now suppose that in year t+5, ? increases from 0 to 1. Suppose that the government is stilldetermined to keep u at 3% forever.d. Why might ? increase in this way? What will the inflation rate be in years t+5, t+6, and t+7.e. Do you believe the answer given in (d)? Why or why not? II. Open Economy 5 points Consider an economy whereC=200+0.25(Y-T)I=150+0.25Y-1000iG=250, T=200(M/P)d=2Y-8000i(M/P)s =1600X = 0.3Y*, IM =0.2Y,? (real exchange rate) = 2, Y* is foreign output (Y*=900) 1 a. Calculate the multiplier if the economy is closed and the multiplier if the economy opens up.Explain the economic intuition why two are different with 3-5 sentences.b. Solve for the equilibrium level of income (Y) for the open economy (Yopen) and calculate thetrade balance (NX).c. Solve for the equilibrium level of interest rate for the open economy (iopen).d. If government follows an expansionary fiscal policy and G changes by 60, calculate thechange in Y for both the closed economy (?Yclosed) the open economy (?Yopen). Assume nochange in the foreign output (Y*), Calculate the new trade balance.e. If this economy has flexible exchange rate regime, how would the exchange rate respond to afiscal expansion policy? Appreciation or Depreciation? Explain why. 2