Question

QUESTION 8 (15 minutes) LO6bii - Monetary policy/inflation& inflation targeting 11 MARKS a) Assume that you are the Governor of the Reserve Bank. Economic data forecast an increase in the GDP from 2.0% to 2.4%. The increase in the GDP is generally indicative of the movement of other economic indicators. State whether you expect the following indicators to increase or decrease and for each give one reason to support/explain/justify your answer: CPI (1 mark), unemployment (1 mark), exchange rate (1 mark). Note: the mark is given only for the reason/explanation. (3 marks) b) Resulting from the GFC central bankers have sought creative ways to stimulate the economy. First came 'quantitative easing' and later 'negative interest rates'. These measures are controversial. Explain how quantitative easing and negative interest rates are supposed to work (4 marks) and for each provide an outline of one issue over which there has been controversy i.e. what negative concerns have been expressed (4 marks). (8 marks)

Could you please help me to answer these questions with clear writing or typing! Thank you very much!

Answer 1

1) the rise in GDP will lead to increase in inflation because as we know GDP implies both total output and income so as income of the nation increases it is obvious that the CPI will increase.

talking about unemployment, it will decline as we know from the theory of philips curve there is tradeoff between unemployment and inflation. so as inflation is supposed to rise here, most probably unemployment will decline.

exchange rate will increase because as there is increase in inflation the home countrys currency becomes less valuable making it weaker in comparision to foreign countrys currency.

2) quantitative easing is a process of injecting money and maintaining liquidity in an economy. here central bank buys securities from the public and injects money in the economy by this process. negative interest rate is also another way of maintaining lequidity in the economy, here bank charges interest rate from the public to keep the deposits rather than giving interest rate on the deposit. so generally the public will not prefer to keep money in bank and they will keep it with themselves. both the methods were implemented by the government during GFC but the problem is that injection of too much money in the market will ultimately increase the inflation which is not good for the economy.