QUESTIONS FOR REVIEW
1.’ Draw the short-sun trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another?
2. Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long run trade-offs are related?
3. What is natural about the natural rate of unemployment? Why might the natural rate of unemployment differ across countries?
4. Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short run trade-off between inflation and unemployment?
5. The Fed decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short-run costs be reduced?