 Solution

The first step is a vinylogous aldol condensation at C5 of the unsaturated lactam. Number nitrogen N1, the lactam carbonyl C2, and then the methoxy-substituted alkene C3=C4 and the methylene group C5.

hydroxide reversibly removes a C5 proton. The resulting vinylogous enolate is delocalized through C5–C4–C3–C2–O: it is not necessary to create an unstabilized isolated carbanion beside nitrogen. Its C5 nucleophilic contributor attacks acetone. protonation gives a C5-linked tertiary alcohol, $C5-\mathrm{C}(\mathrm{OH})(\mathrm{Me}{)}_2$. Further removal of the remaining C5 hydrogen and elimination through an aldol-dehydration sequence forms C5=C(Me)2, leaving the original methoxy enol ether in place.

In the second step, aqueous acid hydrolyses that enol ether to a ketone at C4. protonation at C3 gives an oxygen-stabilized cation at C4. water attacks C4, proton transfers form a hemiacetal-like intermediate, and loss of methanol followed by deprotonation produces C4=O and the C3 methylene group.

The lactam carbonyl and N–H group remain, as does the exocyclic isopropylidene group. This accounts for replacement of the C3=C4–OMe unit by C3H2–C4=O without inserting a new oxygen into the ring skeleton.