1. Answer the following questions about inflation.
   1. The Phillips curve diagram has unemployment on the horizontal axis and inflation on the vertical axis. Professor Phillips of the London School of Economics published a paper in 1958 showing a statistical relationship between annual inflation and employment with low unemployment when inflation was high and high unemployment when inflation was low. Why do economists now believe about the shape of the long run the Phillips curve? Why is the short run Phillips curve downward sloping? Where do the long and short run Phillips curves intersect?
   2. What is the mathematical relationship between inflation Jr, expected inflation Jre, actual employment U and equilibrium employment U*that describes the short run Phillips curve? What happens to the long run and short run Phillips curve if expected inflation increases? Can governments in this model reduce unemployment by increasing inflation in a predictable way?
   3. What are the costs of anticipated and unanticipated inflation?
   4. Is deflation (a negative rate of inflation) desirable?