Macroeconomics: Inflation, Economic Shocks, and Policy Responses

Macroeconomics 1
MACROECONOMICS
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Macroeconomic 2
Macroeconomic
1. Do you think that inflation imposes a net cost to the economy after considering the
gains and loss? If so, which type of cost? Discuss each scenario below.
Yes, menu cost.
a) (1 mark) Nobu gets paid more frequently and thus has to make more trips to the banks
down the road when inflation is expected to be high.
This is shoe-leather costs is the time and exertion individuals produce to limit the results
of expansion on the disintegrating buying influence of cash. Individuals destroy their shoes in
transit forward and backward to the bank, in a manner of speaking, attempting to ensure the
estimation of their advantages.
b) (1 mark) Nobu gets reimbursed by RMIT for his work-related expenses.
However, sometimes it takes a longer time to reimburse him (quite often in
reality!). When inflation is expected to be high, he is less willing to travel for his
job.
Exactly when inflation is high, people are more uncertain about what to spend
their money on. Moreover, when the extension is high, firms are regularly less
anxious to contribute – in light of the way that they are sketchy about future costs,
advantages and costs. This weakness and perplexity can provoke bring down rates
of money related advancement as time goes on. This is one of the fundamental
worries about high expansion rates. Nations with low and stable swelling rates –
have a tendency to have enhanced monetary execution over nations with higher
expansion.

Macroeconomic 3
c) (1 mark) Responding to unexpectedly high inflation, the manager of the Sofitel Hotel
must reprint and resend expensive colored brochures correcting the price of the
accommodation in this season
High inflation is esteemed inadmissible hence the hotel feel it is best to diminish
it. This will include higher costs to diminish spending and venture. This decrease
in Aggregate Demand (AD) will prompt a decrease in joblessness. The expansion
is diminished, however, there is an expense to other full-scale financial targets. In
this way, it is smarter to keep swelling low and maintain a strategic distance from
later more exorbitant endeavors to lessen it.
2. Among the four economics shocks listed below, you must comment on each shock by
stating which shock is the most preferred and the least preferred from the point of views of
the economic policy advisors. Provide a reason for each comment. If unclear (i.e. cannot
clearly say whether more or less preferred), state unclear and explain why. To answer, fill
the cell marked with? in the following table
Hints: Start from the situation where the economy is at potential output and then think
about the shocks. No need to draw the AD-AS figure. Also, no need to comment on the
policy reaction to each shock. (8 marks)
Type of shock Comments (1 mark each) Reasons (1 mark each)
Positive supply shock It can be described as an
increase in supply that is
rarely experienced. Hence
most preferred
These as a general rule
come as medium-term
mechanical advances that
quickly improve the

Macroeconomic 4
effectiveness of working
and the entry level of the
capital. The redesigns
causes a sum given to
increase and expenses to
drop. For instance, this
season of PCs and robots
has addressed an
outstanding augmentation
ineffectiveness that items
can be mass conveyed on a
tremendous anyway
respectably temperate
scale.
Negative supply shock Negative supply stuns have
numerous potential causes.
Any expansion in input cost
can cause the total supply
bend to move to one side,
which tends to raise costs
and diminish yield. Hence
least preferred
Causes the sum gave to be
immediately lessened, and
the expense to increase
quickly until the point that
another equalization is
come to. Such an event can
be Hurricane Katrina's
antagonistic affects the oil
and fuel production: oil