Consider the expectations augmented Phillips curve model. Suppose that we are starting from long - run equilibrium with a central bank which cares a lot about unemployment and relatively little about inflation. a) Draw and carefully label the graph of this situation. b) Explain where the Phillips curve comes from in this model. c) Explain why the equilibrium you specify is the only Nash equilibrium. d) Now suppose that a new central bank governor is appointed who cares a lot about inflation and relatively little about unemployment. Redraw your graph twice, once showing what happens if private agents know the new governor's preferences and again showing what happens if private agents mistakenly believe that the new governor has the same preferences as the old governor. Explain clearly why the outcome is different in the two cases.
Consider the expectations augmented
equilibrium with a central bank which cares a lot about
a) Draw and carefully label the graph of this situation. b) Explain where the Phillips curve comes from in
this model. c) Explain why the equilibrium you specify is the only Nash equilibrium. d) Now suppose that a
new central bank governor is appointed who cares a lot about inflation and relatively little about
unemployment. Redraw your graph twice, once showing what happens if private agents know the new
governor's preferences and again showing what happens if private agents mistakenly believe that the
new governor has the same preferences as the old governor. Explain clearly why the outcome is different
in the two cases.
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