1. There is full employment, with an inflation rate of 10 percent.

a) Use a Phillips curve to show how fiscal and monetary policy can reduce inflation.

b) What are the costs of this policy?

c) How long are these costs likely to persist?

2. There is no inflation, but 10 percent unemployment.

a) Use a Phillips curve to show how monetary and fiscal policy can move the economy to full employment.

b) What is the cost to be paid for this policy?

c) How long is this cost likely to persist?

d) What option is available to the government if it declines to pay this cost, but still would like to see unemployment fall?