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Weakness of using GDP to measure wellbeing
Measure and its problem
friction, structural and cyclical unemployment
In the long run, the increase in MS leads to inflation
Cost: Shoe leather cost, menu cost and tax distortion
Shape of AD and AS curves
Open market operation
Contractionary and expansionary monetary policy
Draw graph to explain how monetary policy helps with inflation & recession
Instruments & graphing
Multiplier effect and crowding-out effect
For graphing question, please draw graph clearly and label properly, and give brief explanation
Graphing, labeling and explanations all carry marks.
Graphing to illustrate monetary policy (expansionary and contractionary)
China’s central bank tightened monetary policy by raising the interest rates it charges in open-market operations and on funds lent via its Standing Lending Facility.
What type of monetary policy did China’s central bank implement (expansionary or contractionary monetary policy)?
What will be the impact on the economy, all else being equal? Use graph to illustrate.
at price level
(a) The money market
(b) The aggregate-demand curve
3. ... which decreases the quantity of goods
and services demanded at a given price level.
2. ... the
1. When the RBA
money supply ...
Graphing to illustrate fiscal policy
The above-mentioned moves underscore the leadership’s determination to push up funding costs of short-term tenors to rein in leverage and switch to the combination of less monetary stimulus and more fiscal support, after earlier easing fueled bubbles in bonds and the property market.
What types of fiscal support can the government give? Use graph to illustrate its impact.
Increase government purchase or reduce tax rate
Short answer question examples
Explain shoe leather cost.
It refers to the cost of converting between cash and other assets during high inflation.
Explain interest rate effect that is used to explain the downward sloping curve of AD
A lower price level reduces the interest rate, which encourages greater spending on investment goods.
This increase in investment spending means a larger quantity of goods and services demanded.
Explain sticky wage theory
Nominal wages are slow to adjust, or are ‘sticky’ in the short run.
Wages do not adjust immediately to a fall in the price level.
A lower price level makes employment and production less profitable.
This induces firms to reduce the quantity of goods and services supplied.
Is unemployment rate a perfect measure for unemployment? Justify your answer.
It is not perfect measure because at least two groups of people cannot be accurately classified.
Some people may claim to be unemployed in order to receive financial assistance, even though they aren’t truly looking for jobs. They are mistakenly classified as unemployed.
Discouraged workers, people who would like to work but have given up looking for jobs after unsuccessful search, don’t show up in unemployment statistics.
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