Read the article \"Abenomics is doing better than you think\" (Google the title

Question

Read the article "Abenomics is doing better than you think" (Google the title and click the WSJ link), and answer the following questions. 1. Define the term Abenomics. What are its main components? 2. What were the main problems of the Japanese economy before Abe took power (both long run problem and short run problems)? 3. The article says that the Bank of Japan used "QQE" to "boost inflation." a. Why do you think the Japanese economy needs more inflation? b. Use the IS-LM model and the AD-AS model to explain how the QQE policy can boost inflation. 4. The article also mentions "short term stimulus" and "long term debt reduction." a. Use the IS-LM model to explain how short term stimulus can help the economy. b. Use a model you learned in chapter 3 to explain how "long term debt reduction" can help the economy.

Explanation / Answer

1. Abenomic refers to the three pronged program launched by and name after prime minister Shinzo Abe, which is aimed at bringing Japan out of deflation and get its economy growing again. Its three arrows are:

(i) monetary stimulus measures

(ii) short-term fiscal stimulus and long-term debt reduction

(iii) structural reforms.

2. Japan has been in deflation for decades. Its financial markets had fared poorly and economic growth had stalled. Abenomics aimed to reflate the economy and get it back on track. Further, in long-term reforms it aims to introduce structural reforms like joining the Trans-Pacific Partership, and reforms in the agricultural sector in order to reduce factors which are hampering Japan's progress.

3 a. A suitable level of inflation is required for any economy in order to help its economy go. Sustained levels of disinflation eat away the economic output and leave the economy in stagnation.

3 B. The IS-LM (Investment/Saving – Liquidity Preference/Money Supply) model explains investment decisions with a given amount of money and the interest received.

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