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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.
(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.
(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.
(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 business strategic distance from later more exorbitant endeavors to lessen it.
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 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 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 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 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.
The figure below depicts the macroeconomic situation of stagflation inflicted by the negative supply shock
1. Expansionary fiscal policy
2. Contractionary fiscal policy
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 policy
Aggregate demand curve
To the right
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
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.
(3 marks)Have a look at the following article,
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 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.
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 since 1991. 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, 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.
1. Damour et al, V.I., 1999. Inflation, 458(2-3), pp.209-218.
2. Gal?, J. and Gertler, 1999. Swelling elements: An auxiliary econometric examination. Diary of Financial Report Economics, 44(2), pp.195-222.
3. Linde, A., 1983. Turbulent expansion. Material science Letters B, 129(3-4), pp.177-181.
4. Lucas, R., 1973. Some worldwide proof on yield swelling tradeoffs. The American Economic Review, 63(3)