REVIEW QUESTIONS
1. What is the Phillips curve? Does the Phillips curve relationship hold for U.S. data? Explain.
2. How does the expectations-augmented Phillips curve differ from the original Phillips curve? According to the theory of the expectations-augmented Phillips curve, under what conditions should the short-run Phillips curve relationship appear in the data?
3.
In a particular economy, recent labor statistics show that unemployment has fallen. Its economic advisor explains that economic expansion and falling inflation may persist if oil prices continue to fall. Can you justify her argument in terms of the Phillips curve?4. Can policymakers exploit the Phillips curve relationship by trading more inflation for less unemployment in the short run? In the long run? Explain both the classical and Keynesian points of view.
5. Why do policymakers want to keep inflation low? Who suffers when there is cyclical unemployment?
6. Two changes are observed in a labor market: firms are quicker to hire and fire workers, and the mismatch across industrial sectors increases. Will these raise the natural unemployment rate? If yes, what government policies would you suggest to lower it?
7. Give two costs of anticipated inflation and two costs of unanticipated inflation. How is the magnitude of each affected if, instead of a moderate inflation, hyperinflation occurs?
8. How does the sacrifice ratio measure the costs of disinflation? Use the expectations-augmented Phillips curve to explain how expectations can reduce the costs of disinflation.
9. Discuss at least two strategies for reducing expected inflation rapidly. What are the pros and cons of these strategies?
10. Why does the Federal Reserve work hard to establish its credibility? What benefits might the public gain if the Federal Reserve has a great deal of credibility?
►