Question 3.
Answer 4 parts, out of 8 parts in this question. if you answer more than 4 parts, the first 4 parts will be considered for marking. (40 marks)
a) Consider a scenario where the Bank of England forecasts the UK economy will be overheating and is attempting to slow the economy down using monetary policy to increase the interest rate. What would be the impact on the pound sterling? (10 marks)
b) Why does the unemployment rate not shrink continuously in a world with continuous technological progress.? (10 marks)
c) Draw the indifference curve for the Central bank’s monetary policy maker if the economy is full of young people and the central bank is inflation averse. (10 marks)
d) Considering an investment equation, � = � 0 − � 1� , What parameter has more impact on investment � or � 0 ? (10marks)
e) Give an example of circumstances under which households distinguish between base and bank money. (10 marks)
f) In a financial crisis, would it be preferable for the government to stabilise the economy using fiscal or monetary policy? (10 marks)
g) A policy that has been advocated to increase employment is a subsidy paid to firms in proportion to the workers’ wages. Suppose that hiring a worker for an hour would cost the firm £40 in wages, but it would receivea10%subsidy of that amount from the government,or £4. So, the net wage cost to the firm would now be £36. How would this affect the price-setting curve?(10 marks)
