Consider an Economy in a Long-Run Equilibrium with Y =

Essay

Consider an economy in a long-run equilibrium with Y = 40 and π = 3.A demand shock in period one causes output to rise to 45 and inflation rises to 4.Then,the updating of expected inflation to equal 4 causes output in period two to decline to 43.85,and inflation to rise to 4.77.Assuming no further shocks,calculate the values of output and inflation for period three.