Question 3. Answer 4 parts, out of 8 parts in this question. if you answermorethan 4 parts, the first 4 parts will be considered for marking. (40 marks)
a) Consider a scenario where the Bank of England forecasts the UKeconomywill be overheating and is attempting to slow the economy downusingmonetary policy to increase the interest rate. What wouldbe the impact onthe pound sterling? (10 marks)
b) Why does the unemployment rate not shrink continuously in a worldwithcontinuous technological progress.? (10 marks)
c) Draw the indifference curve for the Central bank’s monetary policymakerif the economy is full of young people and the central bank is inflationaverse. (10 marks)
d) Considering an investment equation, � = � 0 − � 1� , Whatparameter has more impact on investment � or � 0 ? (10marks)
e) Give an example of circumstances under which households distinguishbetween base and bank money. (10 marks)
f) In a financial crisis, would it be preferable for the government tostabilisethe economy using fiscal or monetary policy? (10 marks)
g) A policy that has been advocated to increase employment is asubsidypaidto firms in proportion to the workers’ wages. Suppose that hiringaworkerfor an hour would cost the firm £40 in wages, butit would receivea10%subsidy of that amount from the government,or £4. So, the net wagecost tothe firm would now be £36. How wouldthis affect the price-settingcurve?(10 marks)
