Compute paths of unemployment output growth rate and

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The current inflation rate (in year 0) in an economy is 18% and the current unemployment rate is 6%. The natural rate of unemployment is 6%, the normal (GDP) growth rate is 3%. The coefficients for the Phillips Curve and the Okun's Law are ? ? 1 and ? ? 0.5 respectively. Suppose the central bank wants to begin a process of disinflation in year 1 such that inflation is reduced every year by 3% until it reaches the desired level of 3%. Given this desired path of inflation, calculate the paths of unemployment, output growth rate and nominal money growth for years 1 through 7. Show and explain all your calculations and in particular, explain why does each variable change as they do.

Reference no: EM13393977

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