Problem
Suppose that the inflation rate is higher than i ∗, that the central bank announces it will reduce the inflation rate, and that it actually proceeds to do this. Answer the following:
(a) Suppose that the private sector believes the central bank announcement. What are the effects on the inflation rate and real output? Show this in a diagram.
(b) Suppose that the private sector does not believe the central bank announcement. What are the effects on the inflation rate and real output now? Show this in a diagram.
(c) Explain your results in parts (a) and (b).
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.