Question 1
'The cost of inflation is zero if it is anticipated.' Explain whether the statement is true, false or uncertain. (12 marks)
Question 2
Suppose the velocity of money grows at 1% and nominal GDP grows at 5% per annum. Answer the following questions based on the quantity theory of money (QTM).
a What is the annual money growth rate?
b What is the annual inflation rate if real GDP increases by 2% per annum?
c Explain (with the aid of an AD-AS diagram) the relationship between the QTM and the aggregate demand and aggregate supply (AD-AS) model with reference to the results in part (b).
Question 3
Suppose the government issues bonds that are indexed to the general price level. Discuss whether unexpected inflation or deflation will help to alleviate the government's real financial burden.
Question 4
Suppose an economy that is initially at full employment faces a substantial increase in the factor cost of production.
a Discuss (with the aid of aggregate output market and money market diagrams) the short-run effect on output, unemployment, general price level and interest rate with a substantial increase In the factor cost of production.
b Discuss (with the aid of an aggregate output market diagram) what kind of monetary policy can be adopted to restore the economy back to full employment equilibrium.
c Suppose the problem you discussed in part (a) relies on the self-adjustment mechanism instead of the discretionary policy proposed in part (b). Examine the possible impact of minimum wage on the self-adjustment mechanism.