Short selling is the practice of borrowing stock then selling it ...

[tsand2]

Short selling is the practice of borrowing stock then selling it with the expectation that its price will fall further so that it can be repurchased and the stock returned to the lender.
 
  The difference in the price sold initially and the price that it was subsequently purchased represents profits for short sellers. Discuss the risks taken by such individuals. What kind of risk profile do short sellers exhibit.

Question 2

If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve?
 
  What will be an ideal response?

[iceage]

Answer to Question 1

Essentially the risk that short sellers are taking is that they could be wrong. Instead of the stock price continuing to fall it could actually rise. The risk is theoretically at least completely open ended since the price could rise substantially and the short seller would end up having to buy back the borrowed stock at a much higher price then he sold it for in order to return it to the lender. This is clearly a risk-loving type of behavior.

Answer to Question 2

Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Federal Reserve follows an expansionary monetary policy, inflation will rise. If expectations about inflation are adaptive, the expansionary monetary policy will increase actual inflation above expected inflation. With no adjustment in nominal wages, the real wage will fall, and the unemployment rate will be pushed below its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a short-run Phillips curve.