a.

Let there be two economies,AandB, which are subject to the same labor supply and demand shocks. While wages inAare fully flexible, they are sticky inB. You know that changes in the unemployment rate inB______.

Group of answer choices

are bigger than inA

are the same as inA

are smaller than inA

None of the choices above. Wage rigidities and unemployment are unrelated.

b.

You are the head of the central bank and you want to maintain a 3 percent long-run inflation rate. Suppose that velocity is constant and real GDP growth is 3 percent per year. Moreover, you know that the current money supply is $150 billion. Your money supply target for one year from today is $______ billion.

c.

You are a staff economist with the Federal Reserve. The chairman says to you, "We are seeing signs of inflation above our target rate, and I don't think the Phillips curve is very steep. What should we do to bring the rate back to our target rate?" How do you respond?

Answer:"Because the Phillips curve is relatively flat, we need to

[ Select ]

["

decrease

", "

increase

"] interest rates

[ Select ]

["

by a little

", "

by a lot

"] in order to

[ Select ]

["

raise

", "

lower

"] investment, as the change in inflation is not very responsive to changes in output."