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B16. [18 marks in total] Many central banks, including the Bank of England, have adopted a monetary policy of targeting a low, positive and stable
B16. [18 marks in total] Many central banks, including the Bank of England, have adopted a monetary policy of targeting a low, positive and stable inflation rate. In addition, the Bank of England also supports the Government's objectives for growth and employment. a) Explain why it is good to target a "low, positive and stable" inflation rate. [6 marks] b) What is a recession and what are its characteristics? [4 marks] c) When the U.K. economy goes into recession, how should the Bank of England set the official Bank rate to help bring the economy out of recession? Explain the mechanism and refer to the characteristics you listed in part (b). [8 marks] B17. [18 marks in total] Various surveys show that unemployment is among one of the most unhappy states people experience. Tackling unemployment is top priority for government. a) Describe how a simple search theory that focuses on the behaviour of job seekers explains the factors that can contribute to unemployment. [6 marks] b) An alternative theory of unemployment is due to wage rigidities. Describe how efficiency wage can explain wage rigidity. [6 marks] c) Some economists argue that higher unemployment benefit can increase unemployment while others argue
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