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1. Referring to the graph below, Belgium (BEL) 10 8 . . ...... RATES (percent and percent/year) Unemployment ..... Inflation 2 1970 1980 1990 2000

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1. Referring to the graph below, Belgium (BEL) 10 8 . . ...... RATES (percent and percent/year) Unemployment ..... Inflation 2 1970 1980 1990 2000 2010 TIME (year) compare and contrast inflation in 1980 and 1990 in terms of cost-push and demand-pull (both are possible in certain circumstances). Note that the non-accelerating inflation rate of unemployment (NAIRU) is a proxy for the natural rate of unemployment. Support your explanation with the appropriate equation(s). Hint, Okun's law may be helpful here. 2. What are the three functions of money? 3. Briefly explain how the Federal Reserve acquires assets through open-market operations (i.e., reverse-repo trades). 4. Briefly explain what required and excess reserves are and what the current level of excess reserves in the United States says about the willingness of commercial banks in the United States to lend. 5. Using the Quantity Theory of Money, derive an expression for the rate of inflation for the case when the velocity of money is not a constant and use it to explain the pre-1990 and post-1990 curves on slide 32 of lecture 16

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