1. Assume that the Phillips curve has shifted from position I to II in Figure 1. Assume that the government blames the cost-push inflation on a growth in the power and militancy of trade unions. Its long-term goal is to reduce this power by passing anti-union legislation, and hence to get the Phillips curve to shift back again. However, it believes that it will be able to do this only if it can weaken unions’ resistance to the government in the short term by having a large rise in unemployment. Trace out the path from point a in the beginning and eventually back to point a at the end.

2. If trade unions decide to bargain for higher real wage increases, what effect will this have on the curve?

3. What determines the slope of the curve?