1. If inflation increases less than expected, the actual unemployment rate will be ________ (above/below) the natural rate.

2. Robert E, Lucas, Jr., explained business cycles by rules of thumb._____ (True/False)

3. The increase in the fraction of young people in the labor force that occurred when the baby-boom generation came of working age tended to _____ (raise/lower) the natural rate of unemployment.

4. In the late 1980s, as unemployment fell below the natural rate, inflation ________.

5. Targeting the Natural Rate? Because the natural rate of unemployment is the economist’s notion of what constitutes full employment, it might seem logical for the Fed to use monetary policy to move unemployment toward its natural rate. However, many economists believe such a policy would be unwise because the natural rate may shift over time and policymakers may misjudge the correct rate. What would happen if the Fed targeted a 5 percent unemployment rate but the true natural rate were 6 percent?

6. Explaining a Movement in the Inflation Rate. In you can see that inflation rose between 1988 and 1989 with little change in the unemployment rate. Can you explain why?

7. Hysteresis and the Natural Rate of Unemployment. In economics the term hysteresis means that the history of the economy has a lingering effect on current economic performance. Using this idea, explain why a deep recession could lead to an increase in the natural rate of unemployment. Which demographic groups do you think would be affected the most?

8. Oil Price Changes, Vacancies, and the Natural Rate. During the mid-1970s, changes in oil prices required products to be produced by different types of firms in different locations. This raised the number of vacancies relative to the unemployment rate. According to the theory of William Dickens, how did this affect the natural rate of unemployment?

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5.0% 1989 4.5 1990 1991 4.0 1988 3.5 1987 3.0 1986 1992 1993 . 2.5 5.0 6.0 6.5 7.5% 5.5 7.0 Unemplovment rate Infiation rate