Macroeconomics: Inflation, Economic Shocks, and Policy Responses

This article covers topics such as inflation costs, economic shocks, and policy responses in macroeconomics. It also discusses the Australian economy and its potential recession. The article includes a discussion on the effectiveness of contractionary fiscal policy in dealing with stagflation.

Macroeconomics 1
MACROECONOMICS
By (Your Name)
Course
Professor’s Name
Name of the Institution
Location of Institution
Date

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

Macroeconomic 5
rigs and pipelines are
either shut or taken
detached. A hypothetical
instance of this could be if
a key resource
commitment of an
affiliation's creation
technique was found to
have an altogether more
vital application in another
usage, by then the cost of
the data would rise.
Positive demand shock Positive demand shock has
the impact of expanding
total interest in the
economy, prompting
expanded utilization. An
example is interest rate cut
and a tax cut. Hence this is
considered most preferred
Associations anticipating
extended earnings may
respond by enrolling more
workers or broadening
exercises. This extension
in enrolling and financial
development urges back to
provoke significantly more
use. One inconvenience of
a positive intrigue daze is
that it can incite higher

Macroeconomic 6
expenses if the economy is
a nearby full breaking
point, which lifts
development risks
Negative demand shock Negative demand shock has
the impact of making
dread. In this mentality,
individuals are more
disposed to spare as
opposed to expending. An
example is stock market
crashes and natural disaster.
Hence least preferred
Amidst critical intrigue
staggers, people are less
arranged to put it all out
there to start a business or
look for after a
preparation, which are
practices important to
money related
improvement. Regardless
of the way that these
decisions may recognize
on an individual start, on
an aggregate commence, it
can provoke destroying
financial disasters. To
modify such a negative
intrigue shock,
governments may be
inclined to cut down

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financing costs, cut
appraisals or augmentation
spending to reverse a self-
strengthening negative
winding. This is essentially
wanted to familiarize a
positive intrigue stagger
with kill a negative one.
3. The figure below depicts the macroeconomic situation of stagflation inflicted by the negative
supply shock
P SRAS1
As the economic advisor to PM Scott Morrison (!), you are contemplating the most appropriate
policy response from the two choices (note that we do not consider the monetary policy here) in
a given scenario below;
SRAS0
Y
Y0
P0
LRAS0
AD0
A
P1
Y1
B

Macroeconomic 8
 Expansionary fiscal is whereby the organization raises use and conveys forces down
to help money related advancement. Diminished appraisals help the private part in
putting resources into critical endeavours, work, and physical expansion. In the
present world, the most appropriate movement is a contractionary strategy. The
overall economy has recovered from the giant retreat and it is basic to keep a
comparative sort of budgetary air takes that happened already.
 Contractionary fiscal policy happens when the organization and its consequents cuts
down its utilizations, in like manner reducing spending or expanding tax collection.
Right when an assembly lessens its spending and additionally increases charges, it
leaves a lower proportion of capital open for private business, in like manner causing
a withdrawal of the economy and as a rule a level of higher joblessness. This make
procedure is commonly used to control the improvement of extension.
For this question, there is no need to demonstrate the answer showing in the figure (but
useful to have it in your mind)!
The policy response focuses on achieving economic growth. What is the best
policy response? Which curve should shift and in which direction? To answer, fill
the gaps in the table below. No need to provide the reason (1.5 marks
Which policy (0.5 marks) Which curve to shift(0.5
marks)
Which direction(0.5
marks)
Expansionary fiscal Aggregate demand To the right

Macroeconomic 9
policy curve
a) How does your answer change if the policy response focuses on achieving price
stability? What are the policy responses? Which curve should shift and in which direction?
To answer, fill the gaps in the table below. No need to provide the reason (1.5 marks)
Which policy (0.5marks) Which curve to shift
(0.5marks)
Which direction(0.5
marks)
Contractionary
fiscal policy
Aggregate demand curve To the right
a) Reviewing the policy responses in part a) and b), which one is most effective dealing
with stagflation? Briefly discuss (2 marks)
Contractionary fiscal policy; it does the turnaround: it reduces the level of
aggregate enthusiasm by lessening usage, decreasing theories, and decreasing
government spending, either through cuts in government spending or additions in
charges.
4. (3 marks) Have a look at the following article,
https://www.theguardian.com/business/grogonomics/2018/mar/08/australia-isnt-in-
recession-but-we-might-as-well-be
Supposing the Australian economy is heading for a recession, what should (or can) the
current government now do to deal with this? Use the economics knows that you have

Macroeconomic 10
acquired in this course so far to elaborate your discussion. You need to write at least half
a page in length (please do not use bullet points). Note that presenting a list of reference
is preferred. But not required.
Australian government is not far from experiencing recession, from the data updated in the
previous four years, Australia has had a constant GDP percentage growth and this is not a good
trend on the government's economy. Perhaps there is a lot of spending in the government. The
high rate of employment could possibly be one of the factors of slow economic growth. Australia
is standing firm in the midst of developing calls for migration checks, even as the U.S. What's
more, Europe capitulate to rising populism. It has a minimal decision if it's to proceed with a
time of record financial extension. A surge of entries that is swelled the populace by 50 percent
in the course of recent decades has supported the financial development and enabled a
progression of governments to flaunt staying away from retreat. Populists are pointing the finger
at migrants for the over-troubled foundation, taking off lodging costs and low wage
development.
Australia's past Prime Minister Tony Abbott, now on the organization's backbench, is among the
ones who said enough. They needs to slice yearly reward to 100,000 homeless people from
180,000, a move the organization could draw back its gives as much as $4 billion ($2.9 billion)
in the past few years. Against multiculturalism congress individual Pauline Hanson calls on zero
development, could wreck fiscal improvement is presently holding up underneath its 10-year
typical. Australia's movement course of action has given it inclination over other made nations in
making solicitation, usage, and business. It's the test for government authorities to regularly,

Macroeconomic 11
clearly illuminate why it's useful and basic for voters not to be impacted by populist considering.
That is unquestionably less complex said than done.
Scott Marrison gave it a try in pointing out a positive step in the government and said that a third
of the increases was due to average wages in the country. But what is supposed to be seen as
Australia is known in good growth of economy, wages should increase by approximately 60%
out of the total wage growth of the country.
References
Damour, V.I., 1999. Inflation, 458(2-3), pp.209-218.

Macroeconomic 12
Galı, J. and Gertler, 1999. Swelling elements: An auxiliary econometric examination. Diary of
Financial Economics, 44(2), pp.195-222.
Linde, A., 1983. Turbulent expansion. Material science Letters B, 129(3-4), pp.177-181.
Lucas, R., 1973. Some worldwide proof on yield swelling tradeoffs. The American Economic
Review, 63(3).