A) Why do economists refer to the economy as "fully employed" even when there is measured unemployment as high as 4.5% -5% ? (Hint: begin your answer with a definition of full employment and then compare with the concept of natural rate of unemployment, NAIRU; what is it and why?). How do you relate the most recent unemployment rate (Look for Jan, 2012 data on unemployment rate in www.bls.gov) to your conclusion of this question indicating if the US economy is in a state of full employment? Feb 2012 unemployment data will be announced on March 2nd.

B) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate (NAIRU)? Explain your answer in a few sentences. What state of business cycles (such as recession, trough, recovery or boom) does the current US economy face, and why?

C) Draw an AS/AD diagram illustrating your answer to part (B) That is, draw an AS/AD diagram which shows what happens if strong growth in AD has pushed actual RGDP to a level above potential (full employment) RGDP. Be sure to label all lines and axes in your diagram clearly.