Assignment Problem: Despite gradual recovery from the Covid crisis, inflation in Japan remains below the Bank of Japan's (BOJ) target of 2%.
1. The BoJ has decided to pursue lower interest rates (the Economist, May 2022). Use the money market to determine what kind of monetary policy (expansion or contraction) is needed to achieve the decrease in interest rates.
2. Use the IS/LM/FE model to predict the short-run and long-run effects of the monetary policy of above on Japan's output, interest rate, and prices. Is this the appropriate policy to boost inflation?
3. Use the AD/AS model to predict the effects of the same monetary policy of (1) on Japan's GDP, the price level, employment, and real and nominal wages. Does it matter if wages are flexible?
4. Japan's demographics mean that its labor force is currently shrinking. How does that change your answer in (above) about employment, unemployment, and wages? Use the labor market.