A. Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short-run trade-off between inflation and unemployment?

B. The Fed decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short-run costs bereduced?

C. Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case.

a. Actual inflation is 5 percent, and expected inflation is 3 percent.

b. Actual inflation is 3 percent, and expected inflation is 5 percent.

c. Actual inflation is 5 percent, and expected inflation is 5 percent.

d. Actual inflation is 3 percent, and expected inflation is 3 percent.