4. The figure below depicts the macroeconomic situation of stagflation inflicted

Question

4. The figure below depicts the macroeconomic situation of stagflation inflicted by the negative supply shock. SRAS LRAS SRAS p? AD® As the economic advisor to PM Scott Morrison (!), you are contemplating the most appropriate policy response from the two choices (note that we do not consider the monetary policy here) in a given scenario below; eExpansionary fiscal policy . Contractionary fiscal policy For this question, there is no need to demonstrate the answer showing in the figure (but useful to have it in your mind a) The policy response focuses on achieving economic growth. What is the best policy response? Which curve should shift and in which direct? To answer, fill the gaps in the table below. No need to provide the reasoin (1.5 marks) curve to rection ? (0.5 mark)

Explanation / Answer

Ans

Expansionary fiscal policy because it will increase employment which is most important , AD curve, rightwards

2 contractionary fiscal policy as it will reduce Aggregate demand and price

AD curve leftwards

3 first policy is better as price increase can be tolerated but unemployment is dangerous and can lead to recession

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