Answer all the questions below.
Question 1
On 3rd Nov 2020 and 2nd Feb 2021, the Reserve Bank of Australia (RBA) announced the purchase of $200 billion government bonds. Assume these money supply increases are permanent. Use appropriate diagrams to show how and why the money supply increase could affect the GDP and the exchange rate in the short run and the long run. How do you think these money supply increases will affect the current account balance? Please use appropriate diagrams to support your answers. [15 marks]
Question 2
The inflation target of the Reserve Bank of Australia (RBA) is 2~3%. In 2020, due to the $200 billion money supply, the inflation increased quickly and soon rose to higher than this target. Around the same time in 2020, the US Federal Reserve injected more than $1.5 trillion into the markets. Hence, relative to the US dollar, the Australian dollar appreciated greatly. The strong Australian dollar has started to hurt the Australian export. Please discuss whether it is possible for the RBA to keep the inflation within the target and, at the same time, prevent the appreciation of the Australian dollar. [15 marks]
Question 3
As a result of the coronavirus pandemic, the Chinese government is planning to spend US$131 billion on infrastructure to stimulate the economic growth in the coming years. Since China has a fixed exchange rate system, please use appropriate diagrams to explain what impacts the infrastructure spending could have on the Chinese economy in the short run. Due to the huge expenditure on infrastructure, however, its debt increases significantly. Thus, it is expected that the income tax and business tax will increase in the future. In order to keep the output at the level they achieved in the short run, what policy measure(s) may China need to undertake? [15 marks]
Question 4
Due to the COVID-19 outbreak, many European countries put lockdown rules in place. Hence, the output supply in Europe has significantly decreased. Please use appropriate diagrams or theories to explain how the output supply decrease in Europe can affect the long run nominal Dollar/Euro exchange rate. Once the pandemic is over, what fiscal or monetary policy could they use to increase output and stabilize Dollar/Euro exchange rate? [15 marks]
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