The recent monetary policy response in the US to a positive shock

Consider the recent monetary policy response in the world's largest economy, the United States. It has become evident that the Federal Reserve is serious about reducing the annual rate of inflation which one year ago was 8.2% in September of 2022. Raising the US cash rate quite sharply can be an effective tool at reducing inflation, but this has implications for other advanced economies such as Australia - as pointed out in the following articles (listed in chronological order):

Pupazzoni, Rachel (2022) 'The Aussie dollar is dropping against the US currency, but it's not all bad news', ABC News, October 5th, available: https://www.abc.net.au/news/2022-10-05/usd-aud-exchange-rate/101492848

Smialek, Jeanna (2022) 'Inflation Is Unrelenting, Bad News for the Fed and White House', New York Times, October 14th, available: https://www.nytimes.com/2022/10/13/business/economy/high-inflation.html [Free access, see Reading List on ECON1000 Blackboard site]

Comment on the changes in the Australian dollar as the Reserve Bank of Australia (RBA) followed suit in raising, albeit not as aggressively as the US, its own cash rate. In your answer, provide some data for both countries of the change in the cash rate and the exchange rate (expressed in AUD terms) for two points in time: late-March 2022 and late-October 2022.

[300 or so words is the suggested amount for Q3a]

6 marks for quality of analysis and use of data

Use the multiplier AD model and Phillips curve diagram to illustrate and explain in detail how the aggregate demand function in the US economy is expected to shift in a year from now (2023 to 2024) as the Federal Reserve aims to keep long-term inflationary expectations low. In your answer, elaborate in words (no additional figure required) on the different ways in which US households (more vs. less credit-constrained) are expected to respond to such contractionary monetary policy.

[500 or so words is the suggested amount for Q3b]

10 marks for quality of analysis, including linked diagrams

Apply key economic concepts taught in Modules L3, L4, L7, L8 in ECON1000 TRI2A 2023, and refer to key sentences and ideas from the salient articles to support your analysis - where relevant.