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Individual Assignment - Doc

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Added on  2020-01-23

Individual Assignment - Doc

   Added on 2020-01-23

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Instructions: Please read the instructions below before attempting the assignment.Answer all questions. You must write your answers in this document and submit it asyour assignment. Your answers must be placed in the boxes provided. Adjust the boxsize as required. Make sure your answers are tidy and clear and show all working. Ifyou do not have Microsoft Word on your computer then please use the version whichcan be found here: http://www1.rmit.edu.au/students/mydesktop.If assignments are late then marks will be deducted at 10% of the total possible markper day. Of course, if you have encountered some trouble and have been unable tomeet the deadline then please apply for Special Consideration. This webpage providesinstructions about how to go about this:http://www1.rmit.edu.au/students/specialconsideration. This is an individual assignment. That means it must be your own work and you can’tcopy or get help from anyone. However, it is fine to discuss the issues, ideas and howyou may approach the questions with fellow students. By submitting this assignmentyou are declaring that: 1.I hold a copy of this assignment, which can be produced if the original is lostor damaged.2.This assignment is my original work and no part of it has been copied fromany other student’s work or from any other source except where dueacknowledgment is made.3.No part of this assignment has been written for me by any other person exceptwhere such collaboration has been authorised by the lecturer/teacherconcerned and is clearly acknowledged in the assignment. 4.I have not previously submitted or am currently submitting this work for anyother course/unit.5.This work may be reproduced and/or communicated for the purpose ofdetecting plagiarism.6.I give permission for a copy of my marked work to be retained by the Schoolfor review by external examiners.7.I understand that plagiarism is the presentation of the work, ideas or creationsof another person as though they were my own. It is a form of cheating and isa very serious academic offence that may lead to expulsion from theUniversity. Plagiarised material can be drawn from, and presented in, written,graphic and visual form, including electronic data, and oral presentations.Plagiarism occurs when the origin of the material used is not appropriatelycited.8.Enabling plagiarism is a similarly serious offence. It is the act of assisting orallowing another person to plagiarise or to copy your work. It will be dealtwith in the same way as plagiarism. You can find information about the RMIT policies and procedures around plagiarismhere: http://www1.rmit.edu.au/browse;ID=sg4yfqzod48g1.
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Question 1 (2 + 2 + 2 = 6 marks)The expectations augmented Phillips Curve has the form: π=π❑e−ε(u−u¿). Suppose thatcurrently in the economy we have, ∆MM=π=π❑e=20%, u=u¿=5% and some points alongthe expectations augmented Phillips Curve are illustrated in the table below.Exhibit APrice Inflation (π)% Unemployment Rate (u)243224205186167148(a)Given the data in the table calculate the value of ε in the expectations augmentedPhillips Curve. π=π❑e−ε(u−u¿)In this, the above mentioned present elements show the following:Π = inflation Πe = expected inflationβ = It denotes response of inflation in relation to the cyclical unemployment (u - un) = cyclical unemployment V = supply shocksFrom evaluation, it has been identified that the value of slope is -2 respectively. Hence, byconsidering such aspect it can be stated that situation of situation of cyclical unemploymenthas negative impact on the inflationary trend or aspect. Thus, it can be said that value of β is -2 which in turn shoes that inflation level decreases in line with the situation of cyclicalunemployment. (b)The central bank would like to have, ∆MM=π=0%. Illustrate the gradualist and cold-turkey approaches to getting inflation down using the Phillips Curve assumingadaptive expectations. In the case of the gradualist approach assume that ∆MM is cutin two sets; first to 10% then to 0%. Identify the maximum unemployment rate thatwill be reached in the case of the cold-turkey approach.There are mainly two strategies that can be employed by central bank to reduce the level ofinflation namely gradualist and cold-turkey approach. Gradualist approach lays emphasis onmaking small reduction in the money supply growth rate. This in turn places positive impacton the shift which takes place in the level of aggregate demand and supply. Hence, suchapproach ensures full employment at lower inflation rate. On the other side, cold turkeyapproach starts with the huge reduction in the growth of money supply rate. It is one of the
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major aspects which in turn differentiate both the approaches from each other to some extent.By considering the cold-turkey approach it can be stated that maximum level ofunemployment is 10% in accordance with the formula of ∆MM=π=0% at different sets. (c)For the case of cold turkey, how would the adjustment process you outlined abovediffer if economic agents had rational expectations? [Instructions: No diagramsshouldbe used here. Explain your answer in words. Maximum 100 words. You must enterthe word count of your answer.]In economics, rationale expectations may be defined as a economic theory which presentsthat individual agents take their decisions by undertaking the best information which isavailable to them. Along with this, economic agents also consider past trends while takingdecisions. Rationale expectations imply that economic agents should take decisions by takinginto account the learning from past trends. Cold-turkey approach lays emphasis on holdingthe money supply growth rate low to the significant level. Moreover, such approach assists inreducing the inflation rate and thereby facilitates high level of output and employment. Thus,expectation level of economic agents and adjustments according to the cold-turkey approachdo not differs significantly. Question 2 (2 + 2 = 4 marks)Suppose that the economy is at full employment and is hit by a negative supply shock such asa large rise in oil prices. (a)Illustrate this in an AD-AS diagram indicating the new level of prices and output.(b)Discuss and illustrate in an AD-AS diagram the short run and long run effects on theeconomy of the central bank adopting the following policies. [Instructions: Maximum50 words. You must enter the word count of your answer.](i)doing nothing
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