1) For many years, farmers complained that the value of the New Zealand Dollar was too high. We know that a high value of the NZD means that exports are relatively expensive for overseas buyers, so it makes sense that a high NZD would hurt them. In 2018, the farmers got their wish. The value of the NZD began to fall:

https://www.stuff.co.nz/business/farming/106399122/exchange-rate-reset-will breathe- new-life-to-agriculture, leading to some relief.

[Ref: Notes 8-1, 8-2, 8-3, 8-4, 9-1, 9-2, 9-3]

a) Let us consider a situation where the exchange rate falls due to some outside factor. What happens to Aggregate Demand? Why does this occur? Link your answer back to the fall in the exchange rate.

b) Using the change you have identified in a) to AD, what should happen to the inflation rate and growth rate in the economy when this change is considered on its own?

c) What happens to Short-run Aggregate Supply when this happens? Why? Again, link your answer to the fall in the exchange rate.

When the exchange rate declines the short run AS will decrease as the costs of inputs rises.

d) Using the change you have identified in c) to SAS, what should happen to the inflation rate and growth rate in the economy when this change is considered on its own?

e) Draw the effects from a) and b) out in an AD-AS diagram, labelling all the axes, curves, and shifts. What happens to the inflation rate and the growth rate in the economy? [Hint: you should find that one of these is an ambiguous change!]

2)In early to mid 2014, the RBNZ increased the OCR multiple times in a row, with an overall 1 percentage point increase to the OCR occurring over four months. You can find the June 2014 announcement here:

https://www.rbnz.govt.nz/news/2014/06/news-release-announcing-mps-for-june-2014.

We want to study how this monetary policy decision affected Aggregate Demand in New Zealand.

[Ref: Notes 8-1, 8-2, 8-3, 8-4, 9-1, 9-2, 9-3]

a) Explain briefly how an increase in the OCR leads to an increase in general interest rates in New Zealand through themoney supply. You may use a diagram if you wish.

b) How does this interest rate increase affect AD? In particular, which components of AD change?

c) Draw the effects of b) in an AD-AS diagram, stating what happens to inflation and growth in the economy when this happens. Note: please leave LAS out of your diagram at this stage, only drawing in AD, SAS, and the changeto AD.

d) Is this monetary policy contractionary or expansionary? Were the RBNZ likely targeting an inflationary or recessionary gap in the economy with this type of policy?

e) Using your answer from d), draw in the LAS curve at the correct equilibrium, labelling the original recessionary or inflationary gap the RBNZ was targeting.