Question 3

Q3. If expectations are adaptive, how will the economy adjust in the short and longrun

in response to contractionary monetary policy? Support your answer with a graph

of the Phillips curve. [10 marks]

A). What effect does government policies have when agents are rational?[5 marks]

B) Kiribati a small developing country has experienced high levels of interest rates in

recent years explain how the risk structure of interest rates and term structure of

interest rates could have contributed to this high level interest rates. [10 marks]

C) Briefly Explain the following statement: Yield curves almost always slope upward

[5 marks]