Assignment 2

• What is the Phillip's curve? Explain the difference between the long run Phillip's curve and the short run Phillip's curve. If policy makers are only aware of the short run curve, what will be the likely consequence of their actions over time?

• It is sometimes said that inflation can be a self-fulfilling prophecy. What do you think is meant by this? What role do workers' expectations (about future inflation) play in the actual inflation rates we eventually observe? Personal reflection: Do you think workers' expectations increase or decrease the inflation rates?

• Data suggests that countries whose central banks are more independent from political forces and pressure perform better economically. Explain why this is the case.