Question

1.The figure below depicts the macroeconomic situation of stagflation[1] inflicted by the negative supply shock.

4. The figure below depicts the macroeconomic situation of stagflation inflicted by the negative supply shock. SRAS LRAS SRAS Pl Po AD Y1 Y

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;

Expansionary fiscal policy

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)!

a)The policy response focuses on achieving economic growth. What is the best policy response? Which curve should shift and in which direct? To answer, fill the gaps in the table below. No need to provide the reason (1.5 marks)

Which policy? (0.5 mark)	Which curve to shift? (0.5 mark)	Which direction? (0.5 mark)
?	?	?

b)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 direct? To answer, fill the gaps in the table below. No need to provide the reason (1.5 marks)

Which policy? (0.5 mark)	Which curve to shift? (0.5 mark)	Which direction? (0.5 mark)
?	?	?

c)Reviewing the policy responses in part a) and b), which one is most effective dealing with stagflation? Briefly discuss (2 marks)

[1] A period of falling output and rising prices