Question

l Telenor PK 4G 9:50 AM ④ 32% 10 Back HW23 1. 15] The graphic below shows actual inflation (this is labeled headline inflation in the chart) and inflation targets for a number of countries in 2014 Undershooting September 2014 or latest Output ga Infation target I Headine CPI ICore CP srael Euro area Britain! South Korea United States* China Canada Japan India Brazil "Excludes food and erer y escept!bd. nortgagetterest and adjusted for taxes: Ed energy, food, alcohol and tobacco; Exct, energy and unprocessed food:*PCE inde Exct food only; Ao escludes tax inpact Sounces: Central Bank News IMF: Haver Asalytics Using only information in the chart and frameworks developed in this class (i.e., not subsequent events), please answer the following questions a. [5 points] At the time of the chart, which monetary policy would you have recommended for Sweden? Please explain in 2 sentences. b. [5 points] At the time of the chart, which monetary policy would you have recommended for Brazil? Please explain in l sentences c. [5 points] If both Japan and China were to achieve their inflation targets, what do you expect would happen to the value of the Japanese Yen relative to the Chinese RMB in the long run? Please select one and explain in 1-2 sentences The Yen will appreciate The Yen will depreciate 2. [20] A recent issue of the Economist magazine reports that Brazil has a fiscal budget deficit of 7% of GDP. The current account deficit is 1% of GDP. The current inflation rate in Brazil is 4% (about the inflation target). The current unemployment rate in Brazil is 11.6%, which is higher than the long run average. The Brazilian government is attempting to reduce the fiscal budget deficit.

Answer 1

Answer 1

(a) As both Core and Headline inflation for Sweden are lower than their target, monetary authorities should increase money supply by cutting interest rate. As the money supply increases, aggregate demand (AD) would increase due to more money in hands of people. In short run, aggregate supply (AS) would remain constant, so there would be price increase - inflation.

(b) For Brazil, both headline and core inflation are above their target. With an intention to curb the inflation, monetary policy authorities should suck the liquidity by increasing the interest rate. This results in less money in hand of people and inflation will be controlled.

(c) Yen will appreciate.

Chinese inflation is lower than the targeted inflation and hence the monetary authority should decrease the interest rate. This results in outflow of the capital from Chinese market resulting in RMB depreciating.

In case of Japan, headline inflation is above the target and so they need to increase the interest rate to curb the money supply. In the process, there will be inflow of foreign capital into Japanese economy due to elevated interest rate resulting in appreciation of Japanese Yen.

Answer 2:

(a) GDP growth rate will decrease.

As fiscal authorities successfully reduce the budget deficit, they have reduced the fiscal expenditure. So G in Y = C+I+G+X-M is going down. Less government expenditure also results in lower employment resulting less income in hands of people resulting in lowered consumption and hence in short run GDP will decrease.