Reference no: EM134046205

Question 1.

Using the Keynesian Cross and the IS-MP diagrams, provide answers to the following questions. For each answer that you provide, number each shift in curves that you make and also number any movement along curves. Using your numbering of the shifts and movements along the curves provide an economic explanation for the reason behind the shift or movement along the curve.

Part I

Suppose that bad news about expected pandemic conditions in the United States results in a reduction in the interest rates paid on assets that are demoninated in U.S. dollars.

Using your diagrams illustrate how this situation will affect the Australian economy. Specifically, show the effects on (demand-determined) output as well as the Australian interest rate and explain how the changes in output and interest rates arise. Start your economy at an initial condition where output is labelled Y0 and the initial interest rate is i0. Label the level of output and interest rate that prevail after all the adjustments occur by Y and i.

Part II

Now suppose that the Reserve Bank of Australia (RBA) wishes to prevent the conditions from the U.S. financial markets from affecting the level of output in Australia. How can the RBA adjust i∗ in order to ensure that output returns to Y0? In a new set of diagrams illustrate and explain your answer. Be sure that your new diagrams start off from (Y , i) of your answer to Part I. (Don't forget to number your shifts and movements along curves so that your written responses correspond to specific adjustments in your diagrams.)