Question 1 Consider an economy with the following data and answer the questions a), b) and c) provided below .
Natural level of output = $560 b
Actual level of output = $500 b.
a) Using the AD- AS model illustrate how this situation can be represented. Make sure your diagram is fully labelled to reflect all relevant information.
b) With reference to the AD-AS model in part a), explain the process by which self-correction takes places to restore the economy's natural level of output.
c) Illustrate the scenario from parts a) and b) to show the impact on inflation and unemployment using the Philips Curve. Be sure to label your diagram and indicate the corresponding points a) and b) on your diagram.
Assume the MAS implements a tight monetary policy. Consider the impact this will have on international capital flows.
a) Explain how monetary policy can influence international capital flows.
b) Illustrate the impact from this scenario, ceteris paribus, to show how Singapore's equilibrium exchange rate may be impacted.
c) Discuss implications for Singapore's economy, ceteris paribus, resulting from a change in the equilibrium interest rate identified in part b).
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