Question

a. If the money supply were to increase by 20%, the real interest rate remains at 9% and output falls by 12%, calculate the change in the price level and the value of the nominal interest rate. State the theories used to calculate these values.

b. Assume that the economy has sticky prices, use the model of macroeconomic equilibrium to illustrate on a clearly labelled diagram the impact on the economy when there are noted supply chain disruptions due to shut down measures in response to the pandemic and the government intervenes to restore disequilibrium.

c. If the government had not intervened in part b. above, describe what would be the current and potential economic outlook for this country.