RWE 2

Question 1

Monetarist Model - Automatic Stabiliser

Answer 1

Who: Technology Industry, US

When: 2022-23

What: Mass firing of employees after C-P inflation

Why: Costs of employment increased too much = made employees redundant

How: Companies made employees redundant, reducing income and AD = auto-correction mechanism by profit maximising companies

So?: Due to little govt. influence, economy self correct without govt. intervention

Question 2

AD increases are always inflationary

Answer 2

When: 2021-22, US

What: Post covid = demand pull inflation

Why: During covid = lots of savings + stimulus by govt to increase economic activity → inflation

How: relaxation after covid and govt stimulus = consumption increase → AD increase → inflation

So?: AD increase → inflation (despite being in deflationary gap (-2% growth rate))

Question 3

Monetarist Model - SRAS exists - Cost push inflation

Answer 3

When: 2022, US

What: Cost push inflation

Why: Costs of FOP increase, especially labor and oil and gas from Ukraine vs Russia

Question 4

Consequences of economic growth on living standards, income distribution and environment

Answer 4

Where: China

When: 1990s - 2010s

What: Rapid GDP growth, 9.5% per year

Why: China’s export-led strategy with cheap labor and large manufacturing hub → rapid economic growth.

How: Exports + Govt. Spending consistenly grow → greater GDP

So?:

• Environmental damage → 2 CO2 metric tons/capita → 8 CO2 mectric tons
• Income distribution gets worse = moderately unequal → one of the most unequal
• Living standards improve overall, better development and urbanisation

Question 5

High inflation, low unemployment (short run philips curve)

Answer 5

Where: Australia, 2023

What: Inflation 7.8%, unemployment rate 3.5% (very low)

How:

AD increase = employment increases + inflation. Labor market is extremely tight so low amount of unemployment

So?:

Pros:

• Better living standards → can bargain for higher wages due to low unemployment.
• Able to afford any inflationary increases

Cons:

• Businesses keep raising prices of goods up → wage-price inflationary spiral
• Negative effects on fixed income and lower income people

Question 6

Low inflation and high unemployment (short run philips curve)

Answer 6

Where: Eurozone countries, Greece and Span

When: early 2010s, after financial crisis

How: Countries faced with prolonged period of low inflation/deflation + high unemployment

So?: Incerased in poverty rates, strained social safety nets

Question 7

Conflict between inflation and unemployment (long run philips curve)

Answer 7

Where: Australia, 1970s

What: Inflation - 14.4% ; UE - 5.3%

How: OPEC increase price → costs of capital increase (SRAS shifts left, SRPC shifts right)

• Extreme increase in costs + insufficient AD = workers laid off → high unemployment + C-P inflation

So?:

Proves LR Phillips Curve → during stagflation, output fell while prices rose → unemployment + inflation = lower living standards for low/fixed income earners in Australia.

Question 8

High economic growth, low inflation

Challenging the notion of trade off between inflation and unemployment

Answer 8

Where: US

When: Mid to late 1990s

What: dot com boom in the US

How:

• Tech advances → higher productivity & efficiency → LRAS shifts right
• Inflation stays low due to efficiency & productivity gains

So?: Positive effects on employment, incomes, overall living standards

Question 9

Monetary policy achieve low inflation (unsuccessful) (Arg - 2018)

Answer 9

• 2018 - 34% inflation
• CMP → increase interest rates and reduce money supply for commercial banks
• 2020 → inflation reached 42%

Question 10

Monetary policy achieve low inflation (success) (NZ - 1990)

Answer 10

• 1990 - 6% inflation
• Reserve Bank establish inflation target between 1-3%
• Official Cash Rate manipulated to make borrowing more expensive
• 1992 - 1% inflation

Question 11

Monetary policy to achieve low unemployment (Successful - US)

Answer 11

Where: US

When: After 2008 financial crisis

What: EMP

How: Lower interest rates + QE → purchasing financial assets to boosts economic activity

So?: Lower interest rates = encourage borriwng and investment → incerased spending → unemployment gradually decline

Question 12

Monetary policy to achieve low unemployment (unsuccessful)

Answer 12

Where: Eurozone, 2010

How: ECB use monetary policy to address fiscal concerns → did not target unemployment

So?: High unemployment rates

Question 13

Fiscal policy to achieve low inflation (success - turkey)

Answer 13

• 2003 - 21% inflation
• Reduced budget deficit and rationalised public spending + reform tax system to increase tax revenue
• 2005 - 8% inflation

Question 14

Fiscal policy to achieve low inflation (unsuccess - thailand)

Answer 14

When: Thailand 1997

How: fiscal policy to curb current deficit → raising VAT to increase tax revenue and cutting expenditures

Impact: Inflation 5% → 8%

Question 15

Fiscal policy to achieve low unemployment (successful - germany)

Answer 15

• Germany = 8% unemployment rate
• Govt spendig on infrastucture, education + tax cuts and incentives to firms for hiring workers
• EFP → unemployment rate = 5% in 2012

Question 16

Effectiveness of SSP (Sucessful - US)

Answer 16

UE rate = 10% in 2009

• FED lowered interest rates and applied QE → purchasing bonds and injecting liquidity into finanical system
• 2015 = 5% UE rate

Question 17

Monetary policy to reduce deflationary gap (success - UK)

Answer 17

Who: Bank of England

When: post-Brexit vote in 2016

What: Announce low rates to boost confidence.

Mechanism: Central bank signals future policy direction → shapes expectations → encourages spending

Result: Prevented a deeper contraction in UK GDP.

Question 18

Limitations of Monetary Policy (Japan)

Answer 18

Liquidity Trap / Low Interest Rates

Who: Japan

When: 1990s

What: Despite ultra-loose policy, weak growth and deflation persisted due to structural issues and ageing population.

Why: When interest rates are already near zero, further cuts have little effect (e.g., Japan & Eurozone).

Question 19

Supply-Side Policies Improving growth and employment (SK)

Answer 19

Who: South Korea

When: 1960s-Present

What:

• Prioritize education –> highly skilled workforce
• Agrarian society –> technological powerhouse
• Investments in education facilitated rapid industrialization and economic growth.

Question 20

Effects of Privatization on Economic Efficiency (UK)

Answer 20

Who: United Kingdom (1980s-1990s)

What: Privatization of British Telecom and British Airways –> increase efficiency through market competition

Results: Improved services and profitability

Question 21

Demand-Pull Inflation due to Overheated Economies (VN)

Answer 21

Who: Vietnam (2007-2008)

What: Strong export growth and FDI –> economic growth

Domestic consumption increase while supply lagged –> inflation

Question 22

Deflation and Its Economic Impacts (JP)

Answer 22

Japan (1990s–2010s)

What:

• Consumer and business confidence plummeted
• Prices fell persistently, which discouraged spending and investment.
• Despite ultra-loose monetary policy, inflation expectations remained negative, reinforcing the deflationary trap.

Question 23

Cyclical Unemployment from Recession (US)

Answer 23

United States (2020 – COVID-19)

What:

• Sharp decline in demand across hospitality, travel, and retail.
• Cyclical unemployment = businesses were forced to shut or operate below capacity.