Question 1

Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 4%.

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Question 2

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.

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Question 3

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

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Question 4

Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 2%.

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Question 5

If there is a decline in business confidence and the Fed desires to return unemployment towards its natural rate, what should it do? If business confidence eventually returns to normal but the Fed does not reverse its policy, what eventually happens to the inflation rate?

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Question 6

Assuming that rational expectations theory does not hold, if a central banks attempts to reduce the inflation rate what happens to the unemployment rate in the short-run?

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Question 7

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve

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Question 8

Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.

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Question 9

Does a more steeply sloped Phillips curve make the sacrifice ratio smaller or larger than otherwise?

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Question 10

A central bank pledges to reduce the inflation rate from 20% to 5%. People reduce their inflation expectations to 10%, but the central bank only reduces inflation to 15%. What happens to the unemployment rate?

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Question 11

The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

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Question 12

Some economists argue suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually need to expand the money supply to pay for its expenditures. Thus, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.

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Question 13

Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

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Question 14

How are the effects of the financial crisis shown using the Phillips curve diagram?

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Question 15

According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

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Question 16

A central bank disinflates. Output is 4% less for one year, 3% less the next year, and 2% less the third year. If inflation fell by 2 percentage points, what was the sacrifice ratio?

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Question 17

In the long run what primarily determines the natural rate of unemployment? In the long run what primarily determines the inflation rate? How does this relate to the classical dichotomy?

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Question 18

Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.

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Question 19

A central bank pledges to reduce the inflation rate from 10% to 3%. People reduce their inflation expectations to 5%, but the central bank reduces inflation to 3%. What happens to the unemployment rate?

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