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ECON1040 Principles of Economics– Tutorial 8 – S1 2022

Tutorial 8, Week 10

1. Monetary Policy (lecture slides + sec. 15.9)

Rather than using fiscal policy and increase government spending to restore full employment following the onset of the COVID- 19 pandemic the government relies on monetary policy, that is, the government relies on the RBA to cut interest rates.

1.1. Explain how the RBA influences interest rates that apply to firms and households,

and how that affects the various components of aggregate demand (C, I and X-M). 1.2. Describe, using a diagram how such a policy would work.

2. Real wages (sec. 15.1)

Explain the relationship between the consumer price level (average price level), nominal wages and real wages.

3. Inflation and claims on output (sec. 15.2)

The following picture depicts the model of the labour market:

Indicate if each statement below is true / false and justify your answer:

1. Workers’ bargaining power can result from an increase in unemployment.

2. Workers’ bargaining power can result from an increase in unemployment benefits, with the wage-setting curve shifting up.

3. After the initial increase in workers’ bargaining power, the firms adjust the wages as well as the prices, to maintain their mark-up. This process can lead to a wage-price spiral, with constantly increasing wages and prices.

4. If the firms adjust the wages as well as the prices, to maintain their mark-up, the real wage of the workers is higher than their real wage before the nominal wage increase.

4. Phillips curve (sec. 15.3 & 15.6)