What is the sacrifice ratio for this disinflation?

ESSAY. Write your answer on a separate sheet of paper.

1) Consider an economy in long-run equilibrium with an inflation rate (?) of 0.08 per year and a natural unemployment rate of 0.05. Suppose Okun`s law holds and a one percentage point increase in the unemployment rate reduces real output by 2% of full-employment output. The expectations-augmented Phillips curve is given by
?=?e -2.5(u-0.05). Consider a two-year disinflation. In the first year, ? = 0.06 and ? e = 0.08. In the second year, ? = 0.04 and
?e =0.05.

(a) In the first year, what is the value of the unemployment rate? (b) Inthefirstyear,bywhatpercentagedoesoutputfallshortoffull-employmentoutput?

(c) In the second year, what is the value of the unemployment rate?

(d) In the second year, by what percentage does output fall short of full-employment output?

(e) What is the sacrifice ratio for this disinflation?

2) For this question, use the Keynesian IS-LM model with flexible exchange rates. Eastland`s main trading partner is Westland. Suppose Westland undertakes an expansionary monetary policy.

(a) What is the effect of Westland`s expansionary monetary policy on Eastland`s real exchange rate in the short run, assuming no change in Eastland`s policies?

(b) WhatistheeffectofWestland`sexpansionarymonetarypolicyonEastland`srealexchangerateinthe long run, assuming no change in Eastland`s policies?

(c) What is the effect of Westland`s expansionary monetary policy on Eastland`s nominal exchange rate in the short run and in the long run?