Answering questions on Policy Assessment and AD-AS diagram

PART A

For each question that involves a diagram you should (a) describe the change(s) you have shown, and(b) explain why the adjustments you have described occur.

PART A

Answer the following questions with reference to Policy assessment 1

1. How would “reduced world activity will mean lower demand for many of New Zealand’s exports” berepresented in an AD-AS diagram? For this question, assume that the SRAS and LRAS curves do notshift.

2. How would the RBNZ’s expectation of “see[ing] retail interest rates decline further as lowerwholesale borrowing costs are passed through to retail customers” affect the LRAS curve comparedto an average year (where interest rates are at a long run rate)? Show the effect of low interestrates on investment in a dynamic AD-AS diagram, and explain what you have represented. Note anyassumption you make about consumer and producer optimism (in the short, medium and/or longrun) that might underpin shifts in the AD, SRAS or LRAS curve(s).

3. Explain why the RBNZ might regard “keeping interest rates low for the foreseeable future” as anappropriate policy response given the “global economic disruption” and economic outlook. Depictthis response in an AD-AS diagram. Illustrate the impact of the policy by showing curves with andwithout the policy response.

PART B

Answer the following questions with reference to Policy assessment 2

4. (i) Explain why “[r]obust global growth and a lower New Zealand dollar exchange rate” would beexpected to “support export earnings”.

(ii) Explain why “capacity and labour constraints… supported by low interest rates” would beexpected to “promote business investment”.

5. How would higher export earnings, business investment, government spending and investment, and“residential construction and housing spending remain[ing] solid” affect the Aggregate Demandcurve? (For this question, ignore any impact on the SRAS and LRAS curves.)

6. How would the tightening in the labour market outlined in the MPS policy assessment and theexpectation that “unemployment rate [will] decline” affect the SR Aggregate Supply curve? For thisquestion, assume that the economy begins at a SR equilibrium where the unemployment rate is higher than the natural rate of unemployment, and that employment is currently below (but close

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