Problem
Suppose that the private sector does not have rational expectations, but instead follows an adaptive expectations scheme. That is, the private sector's expected inflation rate is what the inflation rate was last period. Show in a diagram how the inflation rate and output move over time if the initial inflation rate is the optimal rate i ∗, and then the central bank acts to exploit the Phillips curve. Explain your results.
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.