Reference no: EM133461158

Question 1
Read the article "Are poor countries catching up with rich countries?" by Tyler Smith and the related paper by Paul Johnson and Chris Papageorgiou, and answer the following questions. What is the convergence hypothesis? What is the difference between conditional convergence and absolute convergence? Using a Solow growth model, can you explain the economic mechanisms behind the convergence hypothesis? According to the article, does the real-world data show conditional or absolute convergence? What are the policy implications in light of the convergence pattern in the data?

Question 2
Monetary and fiscal policies are also called demand management policies because they influence the level of aggregate demand (Y) in the economy. Using IS-LM diagrams, answer the following questions. (1) Suppose the central bank tightens monetary policy to reduce aggregate demand. What happens to aggregate demand and the interest rate if the government responds by tightening fiscal policy? What happens when the government loosens fiscal policy instead? (2) Explain the transmission mechanism of monetary policy on aggregate demand in words. In light of your explanation, why does monetary policy become weaker when money demand becomes more sensitive to the interest rate?

Question 3
Inflation in Australia remains high. Global factors like the increase in oil prices and the disruption of supply chains explain much of the high inflation. But strong domestic demand relative to the economy's ability to meet demand also plays a role. In a bid to dampen consumer spending and rein in inflation, the Reserve Bank of Australia (RBA) has aggressively raised interest rates. Using an AD-AS diagram to analyse the following scenarios. (1) Suppose the RBA did not take any action, what would happen to output and inflation in the short run and the long
run? (2) Now that the RBA aggressively tightens monetary policy, what happens to output and inflation in the short run and the long run?