Question One (i) At the beginning of July 2020, the interest rate is set at 0.25%...

 

 

 

Transcribed Image Text:

Question One (i) At the beginning of July 2020, the interest rate is set at 0.25% by the Reserve Bank of Australia (RBA). The current level of output is below the natural level, that is, Y<Y,. Set up an IS-LM diagram to depict this equilibrium point (make sure you show the LM curve at 0%). (ii) If the RBA decides to cut the interest rate to 0%, use the IS-LM diagram to show this monetary policy move. Discuss the short-run effects on output, consumption, and investment. (iii) If consumer and business confidence fall further from the equilibrium point in (ii) because of the ongoing effect of the COVID pandemic, use the IS-LM diagram to show the effect of this shock on the economy. Discuss the options that policymakers have in using monetary and fiscal policies to stimulate the economy back to the natural level of output (Y). Consider the problem of zero lower bound in your discussion. (b) (20 marks) Assume that the RBA has a price target (P²) mandate for conducting monetary policy (which is equivalent to stipulating a zero inflation target, or = 0). Consider the following AS-AD macroeconomic equilibrium in Australia: P PT P₁ A Y₂₁ Y₁₁ AS AD Y At the short-run equilibrium point A, the current level of output is Y, with the corresponding price level at P₁. The economy, however, is not yet at medium-run equilibrium since Y<Y, and P<p. Further assume that the interest rate associated with equilibrium point A is i=0.25%. (i) If consumer and business confidence fall further from equilibrium point A because of the ongoing effect of the COVID pandemic, use the AS-AD diagram above to show the effect of this shock on the economy. (ii) Discuss the policy options that policymakers have in restoring the economy back to the medium-run equilibrium point where Y=Y, and P=P. Consider the problem of zero lower bound in your discussion. (iii) What will happen to the interest rate and the investment level in the medium run? Question One (i) At the beginning of July 2020, the interest rate is set at 0.25% by the Reserve Bank of Australia (RBA). The current level of output is below the natural level, that is, Y<Y,. Set up an IS-LM diagram to depict this equilibrium point (make sure you show the LM curve at 0%). (ii) If the RBA decides to cut the interest rate to 0%, use the IS-LM diagram to show this monetary policy move. Discuss the short-run effects on output, consumption, and investment. (iii) If consumer and business confidence fall further from the equilibrium point in (ii) because of the ongoing effect of the COVID pandemic, use the IS-LM diagram to show the effect of this shock on the economy. Discuss the options that policymakers have in using monetary and fiscal policies to stimulate the economy back to the natural level of output (Y). Consider the problem of zero lower bound in your discussion. (b) (20 marks) Assume that the RBA has a price target (P²) mandate for conducting monetary policy (which is equivalent to stipulating a zero inflation target, or = 0). Consider the following AS-AD macroeconomic equilibrium in Australia: P PT P₁ A Y₂₁ Y₁₁ AS AD Y At the short-run equilibrium point A, the current level of output is Y, with the corresponding price level at P₁. The economy, however, is not yet at medium-run equilibrium since Y<Y, and P<p. Further assume that the interest rate associated with equilibrium point A is i=0.25%. (i) If consumer and business confidence fall further from equilibrium point A because of the ongoing effect of the COVID pandemic, use the AS-AD diagram above to show the effect of this shock on the economy. (ii) Discuss the policy options that policymakers have in restoring the economy back to the medium-run equilibrium point where Y=Y, and P=P. Consider the problem of zero lower bound in your discussion. (iii) What will happen to the interest rate and the investment level in the medium run?

Answer rating: 100% (QA)

Answer in image Answer Here given cell Reaction 2H Nic Nut ax Hg cell EHENN 0 ... View the full answer