1. a) Distinguish between the two output gaps in the economy.
b) Assuming the economy begins in long run equilibrium and policy makers take no action, use AD-SAS-LAS diagrams to show the short and long run effects on output and inflation of a sharp rise in oil prices.
2. a) Define the three main components of money stock?
b) State the money demand equation and explain the relationship between the parameters and variables.
3. a) Show the effects of a Reserve Bank sale of a $100m bond on the Commercial Banks' and also on the Reserves' Bank' balance sheet.
b) Explain the resultant monetary policy transmission mechanism from a) above.
4. a) What is the short-run Phillips curve and what does it purport to show?
b) Explain why/ how the Phillips curve presents government with a dilemma in economic policy?
5. a) What effect would a sharp devaluation of the Fiji dollar have on net export spending?
b) Why could such devaluation cause concern for policy makers?