Equations and diagrams
Answers should be typed in 12pt Times New Roman font and double-spaced with justifled alignment. Start each question on a new page.
Equations and diagrams, if required, must be computer-generated; no handwritten equations and hand-drawn digrams will be accepted.
Referencing should followthe Author-Date system.
Assume the economy is at short-run equilibrium and is in a slump. Ceteris paribus, what
would you expect to happen to the money supply overtime? Discuss in detail the money creation process in a fractional-reserve banking
system. (10 marks)
Consider an economy characterised by the following relationship between inflation and real GDP:
lnflation
rate
10 8 6 4 2
Original Real GDP 480 490 500 510 520
New Real GDP 460 480 500 520 540
Current inflation is equal to 6 per cent, and
potential GDP is equal to 500. Drawthe original AD curve, the new AD curve, and the short-run AS curve. Is the new AD curve steeper or
flatterthan then original AD curve? What change in policy caused the change in the slope ofthe AD curve? (10 marks)
Starting from a
long-run equilibrium with real GDP equal to potential GDP, suppose a fall in oil prices causes a negative price shock. What are the effects,
in the short run and the long run, on real GDP, inflation, consumption, investment and net exports ifthe central bank follows its normal
monetary policy rule? Showthe effects ofa negative price shock in an AD-AS diagram
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