1. Using the IS-LM or the AD-AS model, whichever is more appropriate, analyze the following. Treat each question separately.

1. In the wake of the global financial crisis in 2007-2008, output contracted sharply in many developed economies, prompting governments to pursue an expansionary fiscal policy in 2009. This helped shore up GDP but interest rate did not rise. Why?
2. Fast forward to 2017, when the Trump administration managed to enact major tax cuts in the US even if this meant a ballooning budget deficit and rising public sector debt. US growth has been boosted as a result, but unlike in 2009, fiscal expansion has sent market interest rates higher. Why?
3. Compare the net impact on output that would occur in part A to that in part B? What is the reason for the difference, if any?
4. India suffered a sharp fall in growth in 2016 in the wake of a large-scale "demonetization"the sudden and unanticipated phasing-out of large-denomination bank notes. Why should demonetization matter for the economy? And why the impact so pronounced in India?

1. Answer the following on inflation and monetary policy.

1. Throughout most of the global economy, inflation has continued to surprise on the downside and has undershot central bank targets. Why has inflation been low? What do you think about the future path of inflation?
2. What is the natural rate of interest? What has happened to the natural rate of interest in the past decade and what have been the main factors driving the change(s)? What is the relevance of the natural rate to monetary policy?
3. What are the drivers of inflation?
4. What are "financial conditions"? What has been the trend in financial conditions during the past 12 to 18 months? What is the relevance of financial conditions to monetary policy?