PLEASE ASNWER THIS QUESTION. iT'S SO IMPORTANT FOR ME. I POST IT THIS MORNING AND NO ONE HAS ANSWERED. IF YOU ANSWER I WILL MARK AS HELPFUL AND GIVE YOU A GOOD REVIEW.

QUESTION 4:

USE GRAPH, IF APPLICABLE, AS MUCH AS YOU CAN

a) During the early 1990's, Japan experienced an asset price bubble collapsefollowed by a massive decrease in economic activity. At that time, Japanese inflation was running at 1.76%

(i)Assuming that inflation expectations in Japan were equal to the previous period's inflation rate, show (and explain), using the multiplier model, the labour market model, and the Phillips Curve, how the above mentioned asset price bubble collapse led to drop in economic activity in the short-run and deflationary pressure into the medium run (MR),ceteris paribus. [8]

(ii)Explain the concept of the zero lower bound, and show how it can lead to a deflationary spiral. Use the Fisher equation to aid your explanation.[4]

In 2012, Shinzo Abe was elected Prime Minister of Japan, and he implemented a number of monetary policy reforms in an attempt to help the economy recover. One of these refers to the process of quantitative easing (QE).

(iii)Discuss the process of QE as implemented in the case of Japan. Using your analysis and illustration from part (a), add in the likely impacts of this QE programme on the Japanese economy. [6]

b) Assume that the price level in an economy is stable with expected inflation initially equalling 2%. Further assume the economy is then hit by a recession at the beginning of period 1, and unemployment remains at a constant high level until the beginning of period 4.

With time period on the x-axis and inflation rate on the y-axis:

(i) Plot the path of the bargaining gap (assume it is equal to -2%) from period 1 to the end of period 4. [2]

(ii)Using the same diagram, add in the path of inflation and expected inflation over the same period. [2]

(iii)Provide some reasons for why the bargaining gap might have disappeared after period 4, and state any other assumptions you are making. [2]