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Macroeconomic Assignment Questions

Choose one of the following two options, and complete the three questions for that option.

For whichever option you choose, for each question that involves a diagram you should (a) describe the change/s you have shown, and (b) explain why the adjustments you have described occur.

Option 1: Policy assessment 1

Answer the following questions with reference to Policy assessment 1.

1. How [slowing] global economic growth…would since mid-2018, easing demand for New Zealand’s goods and services” be represented in an AD-AS diagram? For this question, assume that the SRAS and LRAS curves do not
2. How would “restrained investment” (you can interpret this as meaning “lower than usual”) affect the LRAS curve compared to an average year (where investment is at a typical/average level)? Show this in a dynamic AD-AS diagram, and explain what you have
3. Explain why the RBNZ might regard a reduction in the Official Cash Rate (OCR) being an appropriate policy response given “the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in ”? Depict this response in an AD-AS diagram. Illustrate the impact of the policy by showing curves with and without the policy response.

Option 2: Policy assessment 2

Answer the following questions with reference to Policy assessment 2.

1. In reference to the statement “In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets”, how would additional monetary stimulus improve the situation from the Reserve Bank’s point of view? Use a dynamic AD-AS diagram to explain your answer.
2. (i) How would “Heightened uncertainty and declining international trade [which] contributed to lower trading-partner growth” affect the Aggregate Demand curve and short-run equilibrium? (For this question, ignore any impact on the SRAS and LRAS ) (ii) Would the cited easing of monetary policy by central banks internationally, in the absence of a similar policy change by the RBNZ, dampen or exacerbate the equilibrium movement in (i)? Briefly explain your reasoning.
3. Explain why historically low interest rates are “consistent with low expected inflation” using an AD- AS diagram. A useful starting point is consideration of the role of inflation expectations in wage rate negotiations.