Question 3 on Topics 6 & 7 (15 marks)

1. The impact of COVID-19 threw the economy of Symposia into recession. The finance ministry has advised the government to engage in a borrowing spree to kickstart the economy. The finance ministry has advised the government to engage in a borrowing spree to kickstart the slowing economy. It suggests that this borrowing will increase the level of government debt from $10 billion to $14 billion, but that given interest rates are low, that this is a good time to update both the weapons held by the military and to upgrade the fleet of government cars while simultaneously boosting the economy, not just immediately but also into the future. The President of Symposia has asked you, as her chief economic advisor, for your views. In particular, she wishes to know the following:

1. Would spending this money on weapons and cars boost the economy immediately and into the future? Your advise on this is ____________________ (provide your answer and justification on both the immediate and future impact. Feel free to use external resources to assist you in your answer if you prefer).(5 marks)
2. She has also heard that rising debt is bad for the economy, so this initial boost in government expenditure will eventually lead to an even worse economic outlook. She wants to know your opinion on this. Your advise is ____________________ (provide your answer and justification. Feel free to use external resources to assist you in your answer if you prefer).(5 marks)

1. Your father has just stated that a rise in unemployment benefits shows up as an increase in government expenditure in the national income accounts identity, because the government is spending money by giving this financial benefit to the unemployed. Explain why you agree or disagree with this statement, and if you disagree, explain which part of the identity would be changing instead?(5 marks)

I totally disagree about rising in government expenditure as increasing benefits for unemployment.

Question 4 on Topics 6 & 8 (15 marks)

1. Inflation in Classica is currently above the target range of its central bank. What does this tell you regarding Hypothetica's likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram(5 marks)
3. Your mother states that monetary policy is effective because firms quickly react to changes in interest rates by altering their investment decisions. Do you agree or disagree with her statement? Justify your answer.(5 marks)

1. Is money targeting a better tool for central banks to use in the highly recessionary COVID-19 period where inflation has essentially disappeared as a policy issue? Briefly explain your reasoning.(5 marks)