Inflation, Unemployment and Monetary Policy

Problem 1 (20 marks)
Consider the following statement:
“The Phillips curve implies that when unemployment is high, inflation is
low, and vice versa. Therefore, we may experience either high inflation or
high unemployment, but we will never experience both together”.
Is this statement true, false or uncertain? Briefly explain.
Problem 2 (40 marks)
Answer the following questions and illustrate using the feasibility set (MRT) and the
policymakers preferences (MRS).
(a) What would the policymaker’s indifference curves look like if the policymaker cared
only about low unemployment? Which point on the Phillips curve would that policymaker choose?
(20 marks)
(b) What would the policymaker’s indifference curves look like if the policymaker cared
only about low inflation? Which point on the Phillips curve would this policymaker
choose?