How changes in expected inflation result in change

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Reference no: EM133201072 , Length: 1 Pages

Assignment:

QUESTION 1

Katherine is an economics student who has a final exam coming up. She determines that her utility is maximised by studying for 8 hours the day before the exam and predicts this will get her a final mark of 70.

Use a relevant diagram to show Katherine's optimal combination of free time and final exam marks. Put final exam marks on the vertical axis and free time in hours on the horizontal axis.

Just as Katherine is about to sit down to begin her study, her computer is infected with a virus and becomes incredibly slow making it harder for her to study effectively during her study day. Explain the impact this would have on the diagram you have drawn in part a). Suppose Katherine still decides to study for 8 hours. Should she still receive the same level of satisfaction as she had anticipated?

QUESTION 2

Assume that spending in Country Y in 2020 can be expressed by the following equations

C=c₀+c₁ (1-t)Y

I=I

G=G

NX=X-mY

The value of expenditure is summarised by the table below

Expenditure in Country Y, 2020
Autonomous Consumption	$40 billion
Marginal Propensity to Consume	0.55
Marginal Tax Rate	0.3
Marginal Propensity to Import	0.05
Government Expenditure	$140 billion
Investment	$200 billion
Exports	$20 billion

Calculate the equilibrium level of income for Country Y in 2020 showing all steps of working. Illustrate your answer on a well labelled multiplier model diagram.

QUESTION 3

a) Suppose that the minimum wage in Australia is reduced slightly to a level where it is still binding (that is, it is still above the equilibrium wage level). Illustrate the impact on employment of the minimum wage reduction using a demand/supply graph.

b) Explain how changes in expected inflation result in changes in the level of inflation. Use an equation to help explain your answer.

Reference no: EM133201072

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