1. Explain how the Phillips curve is derived from a model of relative price setting. What happens to the Phillips curve if firms expect inflation?
2. Explain why money is neutral in the long run but not in the short run.
3. Does government spending completely crowd out private investment and net exports in the long run? What about the short run? Why?
4. Why does the economy overshoot potential GDP when expectations of inflation depend on last yearâs inflation?
5. What would happen to inflation if policy makers attempted to hold unemployment below the natural rate year after year?
6. If firms expect the Fed to start fighting inflation with an aim of bringing it to zero, will their expectations of inflation suddenly drop to zero?
7. What are some possible reactions of the economy in the short run to an event that causes an aggregate demand shift? To an event that causes a price shock? What about the long run? What if both types of shocks occur at the same time?
8. Explain how the economy would respond to a negative price shock if there were no policy response.
9. Explain why an increase in government purchases decreases nongovernment purchases by the same amount.