Question 1.

Clearly describe how QE differs from the standard Open Market Operations. Also

discuss the effects of a reduction of the quantitative easing policy (i.e. monetary

contraction) on output, unemployment and prices in the short and medium run using the

AS-AD model. (20 marks)

Why do economists advise against fiscal austerity, but some governments still do it (eg,

Argentina during the period 1997-2001 and Ireland in 2010)? (15 marks)

(Maximum word count 700).

Learning Outcome (a) (b) and (c)

Question 2.

Based on your understanding of the aggregate supply and aggregate demand model

and the IS-LM model, graphically illustrate and explain what effect a reduction in the

price of oil will have on the economy. In your graphs, clearly illustrate the short-run and

medium-run equilibria. Also include in your answer an explanation of the effects of this

change in the price of oil on the labour market and the equilibrium real wage. (20 marks)

Inflation in Zimbabwe reached hyper inflation level a few years ago. President Mugabe

then blamed Western governments for restricting trade and driving up prices.

1. a) Could a fall in supply have generated sustained high inflation?
2. b) Why do you think Zimbabwe had such high inflation for a long period of time? (15

marks)

(Maximum word count 700).

Learning Outcome (b) (c)

Question 3.

Using the Phillips curve model with augmented expectations,

1. Estimate the natural rate of unemployment for the UK and France. You should

use data starting from 1980. (20 marks)

1. Are your results consistent with the theory? (10 marks)

You may answer this question using either Gretl, Stata or MS Excel. First, you will need to get the

data on annual unemployment and inflation rates since 1980, which can be obtained from

the World Bank website. Then, estimate the equations and calculate the natural rate of

unemployment.

(Maximum word count 600).

Learning Outcome (b)

Notes: You should use charts to illustrate your answers. You should use packages such

as Paint or MS PowerPoint to generate the graphs. Do refrain from copying and pasting

charts from the internet or, if needed, do reference them properly.

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