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4. Assume the economy is at the natural rate of unemployment. Now suppose that policy makers at the central bank wish to reduce the rate of inflation. Critically explain the possible policy options that the central bank must implement to achieve this goal. As part of your explanations, include the process of economic adjustments in both SR and MR. Your explanations must be in combination of diagrams and words (using the equations is optional).
5. Briefly explain the possible effects of reduction in saving on macroeconomic variables, including the growth rate of output. In the same context, suppose there is an increase in the saving rate. Explain what effect this will have on output, output per worker, the rate of growth of output, and the rate of growth of output per worker. Use both equations and words (using diagram is optional).
6. Use the following aggregate production function to answer the question followed:
Y = f (K, AN), where Y = output, K = capital, N is labor and A is the sate of technology (multiplied by N). AN factor is considered to be the amount of effective labor.
a. A 20% increase in A will cause which of the variables in the above production function to increase by 20%? And why?
b. What will be the growth rate of output for a 10% increase in both K and N?
Hint: Assume constant return to scale of production
7. Assume a country is in a fixed exchange rate regime such as China. Explain what factors might cause individuals to expect that a country will revalue its currency. Explain the various actions that policy makers can choose in response to this expected revaluation.
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