1) An economist is sitting in the Oval Office of the White House, across the desk from the president of the United States. The president asks, "How does the unemployment rate look for the next quarter?" The economist answers, "It's not good. I don't think Real GDP is going to be as high as we initially thought. The problem seems to be the unexpected high crude oil price."

Explain using a diagram how a sharp increase in crude oil price affects the U.S. unemployment?

b) The sacrifice ratio measures the opportunity cost incurred in terms of loss of outputs when inflation rate is reduced. Explain why outputs reduce when a government seeks to reduce inflation rate and vice versa.

c) The Bank of England had been known to target an inflation rate of 2%.

Explain TWO (2) motives for the Bank of England to pursue inflation targeting.