The Government of Zambia has decided to pursue a dual mandate of price stability and economic growth in the conduct of monetary policy. Advise on the possibility of the country achieving both price stability and economic activity stability in the case of a temporary supply shock. Ensure to demonstrate this with the aid of the Aggregate Demand and Aggregate supply framework.
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The Government of Zambia has decided to pursue a dual mandate of
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- In an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of i.e. M - PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) money V ΔΜ =*+g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ehi The nominal interest rate i is determined by i = r" +T, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g= 0.03, r" = 0.05, 6 =1, and V" = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a =0.10? (c) What rate of inflation w maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?Assume the Pakistan’s economy is in recession:Pakistan implements a combination of expansionary fiscal and monetary policy. In the absence of complete crowding out what will be the effect of these policies on each of the following: Aggregate demand in Pakistan The price level in Pakistan Interest rates in PakistanIn an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of money V i.e. M = PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) ΔΜ = +g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ebi The nominal interest rate i is determined by i = r" +7, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g = 0.03, r" = 0.05, b =1, and Vo = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is T = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.10? (c) What rate of inflation maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?
- With the aid of a diagram, discuss the impact of an investment withdrawal from South Africa’s banking and capital markets on employment, aggregate demand, aggregate supply, as well as aggregate output. Explain in detail.Assume the Pakistan’s economy is in recession: Pakistan implements a combination of expansionary fiscal and monetary policy. In the absence of complete crowding out what will be the effect of these policies on each of the following:(i) Aggregate demand in Pakistan(ii) The price level in Pakistan(iii) Interest rates in PakistanIf the domestic currency depreciates,A) using a graph of aggregate demand and supply EXPLAIN how lags in this policy process (mentioned in (a)) can result in undesirable fluctuations in output and inflation.
- Which of the following statements are INCORRECT? "When faced with income shocks, household may not be able to smooth their consumption due to credit market exclusion that hinders their ability to borrow." "Any estimate of potential output will have shortcomings, and for this reason, policy makers do not use output gap to make policy decisions." "In the case of a negative aggregate demand shock that brings output below potential, there is no need of central bank intervention as there is no inflationary pressure in the economy." "When the economy is at its potential output, actual unemployment is equal to equilibrium unemployment"An economy is currently experiencing inflation that exceeds the target rate set by the central bank. Identify and explain the benefits to an economy that stem from having price level stability.Q1 [Inflation in a monetary OLG model] Consider an overlapping generations model in which individuals live for two periods, young and old. The economy begins in period 1, when there are NO numbers of the initial old. In each period t 2 1, Nt young individuals are born, where Nt = nNt-1 and n>1. There is only one good in this economy. The good cannot be stored from one period to the next. In each period, each young individual is endowed with y units of the consumption good and old individuals have zero endowment. The young generations' preference can be expressed use the following utility function: u(c1,t, c2,t+1) = log(c1,t) + B log(c2,t+1) Members of the initial old generation only live for one period and have utility u(co,1) = logc0,1. In this economy, individuals can use fiat money to facilitate trades between different generations. Assume the stock of fiat money M grows at a constant rate y, i.e., Mt = yMt-1, where y >1. The money created each period is used to finance a lump- sum…
- The Central Bank is considering two alternative monetary policies: holding the money supply constant adjusting the money supply to hold the interest rate constant. In the IS-LM model, which policy is better to stabilize output if: all shocks to the economy arise from external changes in the demand for goods and services? all chocks to the economy arise from external changes in the demand for money?Assuming money demand is stable, explain why an economy that uses inflation target for monetary policy is effective in the promotion of economic growth during recession. Which variable helps inflation target to be more effective? Also, would expectations play a role in defining their effectiveness? Draw the AD-AS and IS-LM graph to support your answer. Provide your opinion regarding usage of Monetary Policy on Thai current economic situationD7) IS-LM Model: Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a monetary expansion will have on output, the interest rate, and investment. ( Properly)