QUESTIONS FOR REVIEW

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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?

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QUESTIONS FOR REVIEW