Question

Answer the following questions

4.1  People do not expect the price level to change. Then the Reserve Bank unexpectedly cuts the interest rate so that the quantity of money unexpectedly increases. What is the effect on the price level and real GDP? Be sure to explain what happens to the aggregate demand curve and short-run aggregate supply curve. [3 marks]

4.2  Explain how the events in part (a) could lead to a demand-pull inflation spiral. [2 marks]

4.3  Monetary and fiscal policy are crucial for the management of the macroeconomy. Using the AD-AS model, describe the transmission mechanism of each type of policy and how these tools influence short run GDP.  [2 marks]

4.4 Using the model of the Philips’ curve, explain how a change in AD will impact on unemployment within the economy. What will happen in the long run as expectations adapt?

4.5 The Australian government wishes to boost productivity by investing in education and training for the populace to help in the COVID-19 recovery. Explain how this policy will achieve its intended target using the AD/AS and Philips’ curve models.

Answer 1

1. when there is a change in interest rate it has an impact on the investment which will increase the production and with a high production price of the product will decrease. so aggregate demand increase and quantity output increase and price decreased.

2. As there is a high demand for a product, in short-run supply won't be possible to fulfill so this became an opportunity for business people to hike the price of the product to control the demand. so it is known as demand-pull inflation. in the given figure if there is a shift in AD1 to AD2 then AS1 interaction with AD2 is higher then the original one. Quantity Q1 to Q2 and price P1 to P3.

3. To control the fluctuation in market government use expansionary policy and contractionary policy. it may be the fiscal policy or monetary policy. so fiscal policy government will provide money supply to the market whereas in the case of contractionary policy it may restrict money supply to the market.

4. Using the Ad curve when we explain the unemployment that isa direct relation between AD and unemployment. when there is an increase in AD or shift in AD to AD2 that has an impact on the unemployement but this effect is for the short run . in long run it has very less impact on the unemployment correction.