questions 1-2 required in the problem set


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questions 1-2 required in the problem set 1 answer below » questions 1-2 Document Preview: ECON2004: Macroeconomic Theory and Policy Term 1, Problem set 3 Deadline: 2pm, Thursday 14 November This problem set /class will work as follows: ? soon after the deadline above, written solutions to questions 1 and 2 will be posted on Moodle. ? The problem set will be marked, but class tutors will not go through the solution to the problems in detail ? you are expected to carefully work through these solutions before the class and prepare any questions View complete question » questions 1-2 Document Preview: ECON2004: Macroeconomic Theory and Policy Term 1, Problem set 3 Deadline: 2pm, Thursday 14 November This problem set /class will work as follows: ? soon after the deadline above, written solutions to questions 1 and 2 will be posted on Moodle. ? The problem set will be marked, but class tutors will not go through the solution to the problems in detail ? you are expected to carefully work through these solutions before the class and prepare any questions you want to ask in class ? most of the class will be devoted to the discussion points on the next page 1. Using the IS – MR – PC model (30 marks) Starting from medium run equilibrium, explain the response of the economy to a deflationary shock i.e. one that reduces inflation expectations. Make sure your explanation follows the timeline (available on Moodle). In addition to describing the paths over time of output, inflation and interest rates, at each stage describe carefully what happens in the labour market and the goods market How could fiscal policy instead of monetary policy be used to respond to the shock? 2. Policy effectiveness (20 marks) (a) Describe how monetary and fiscal policy affect output. NB don’t draw diagrams, just explain in words the mechanism by which changes in policy transmit themselves to output. (b) Give two reasons (based on the material covered in the course) why either fiscal policy or monetary policy might have no effect on output. Explain your answer in the context of the model PTO
Discussion points (think about these for the class; don’t hand anything in) (a) What is the mechanism by which the central bank announcing an inflation target translates into an actual inflation rate? (b) How would your answer to q1 change if households had rational expectations? (c) What issues might make using fiscal instead of monetary policy in q1 difficult in practice? (d) How does consumption depend on interest rates? How would this change if the assumption made in the derivation of the PIH that… Attachments: ECON2004Probl….pdf View less » Nov 14 2013 03:43 AM

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