Assignment -

This assignment covers the following topics:

• Monetary system
• Inflation: its causes and costs
• Aggregated demand and supply

Short Answer Questions (answer in the space provided below):

1. Review the chapter on inflation and answer the following questions.

a) Why do some economists claim that we should not worry too much about inflation?

b) Other economists think that there are significant costs associated with inflation above 2-3%. What are they? Briefly discuss.

2. According to new legislation, all workers can earn the same wage specified in the annual contract which they sign on 1st January no matter what happens to prices of final goods and services during that year. This year, the prices of final goods and services fall unexpectedly after the contract has been written on 1 January. In this exercise you must illustrate what happens in the economy in the following AD-AS figure in the short-run. We assume that the economy starts at potential output, depicted in point A below.

a) Start from Point A, demonstrate how the quantity of aggregate output supplied responds to the fall in prices of final goods and services using the figure below? Explain your answer.

b) Start from Point A, demonstrate what happens when firms and workers are permitted to renegotiate their wage contracts? Explain your answer.

3. We studied how the Reserve Bank of Australia (RBA) can influence the money supply in the Australian financial market. Answer each question briefly.

a) How does the open market operations increase the number of dollars in circulation?

b) How does the reserve ratio influence the money supply?

c) What do you think happens to the money multiplier (M) in a financial crisis and what is the likely impact of change in M to the economy?

4. Name the movies which are based on the financial crisis (1 mark!). We had many crises, so you must be able to name more than one movie!

5. Have a look at the following article - Australia isn't in recession - but we might as well be Greg Jericho

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 knowledge 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.

Attachment:- Assignment File.rar