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QUESTION ONE: Price stability and trade
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On Graph One, show the impact of the Reserve Bank increasing the OCR. Fully label the changes, including the new exchange rate R1.
Explain how the increase in the OCR could affect the market for the New Zealand dollar, and how this may negatively affect the trade balance. Refer to Graph One in your answer.
On Graph Two above, show the impact on the economy of the increasing OCR. Fully label the changes.
Explain how the increase in the OCR will affect the New Zealand economy and price stability. Refer to Graph Two in your answer.
Explain why the increase in the OCR will be effective in achieving both price stability and a favourable trade balance in the long run, despite the effect on the exchange rate in the short term. In your answer, refer to Graph One and Graph Two as well as the definition of price stability.
QUESTION TWO: Risk of stagflation and a recession
Stagflation is a situation where inflation is high, economic growth slows, and unemployment remains steadily high. It presents a dilemma for economic policy because actions intended to lower inflation may worsen unemployment.
Sharp increases in fuel and commodity prices along with increasing wage pressure make for significant cost pressures for businesses.
Explain how the significant cost pressures will affect economic growth. Refer to Graph Three and the resource material in your answer.
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On Graph Four above, show the impact of falling domestic confidence on the economy by labelling the new curve, the new price level (PL3), and real GDP (Y3).
Explain the effect of falling domestic confidence on the economy. In your answer explain why it may be more helpful for achieving price stability than it is for economic growth.
Refer to Graph Four in your answer.
Explain why the Government would be more concerned by the significant cost pressures than with falling domestic confidence when dealing with a potential recession. Refer to Graphs Three and Four and the definition of stagflation in your answer.
QUESTION THREE: Influences on employment
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Using the resource information above, explain how the terms of trade could have fallen. Include a definition of the terms of trade in your answer.
Using Model One, explain how the falling terms of trade could affect employment. Refer to the resource material on page 10 in your answer and include examples of imports or exports affected.
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Using Model One, explain whether loosening migration settings would have a positive or negative impact on employment.
Using Model One, explain why the fall in the terms of trade is likely to have a smaller effect on employment than loosening migration settings.