Answer each question in approximately 50-150 words plus diagrams where applicable. No penalty will be applied if your answers do not conform to this word length guide. Your attention is drawn to the statements on rationale and marking criteria provided in the Subject Outline. Question 1 (5 marks) Explain how the original Phillips curve differs from the expectations-augmented Phillips curve (or the modified, or accelerationist Phillips curve). Question 2 (5 marks) Explain what effect a decrease in the future expected interest rate will have on the IS curve and LM curve in the current period. Question 3 (5 marks) Suppose the interest parity condition holds. Also assume that the one-year interest rate in Australia (home country) is 6% and that the one-year interest rate in Canada (foreign country) is 6%. What does this imply about the current versus future expected exchange rate (for the Australian and Canadian dollars)? Explain. Rationale The discipline of economics (and the sub discipline of finance) consists of a body of learning involving five main elements. The first element is observation of economic phenomenon in the world about us. The second element is the development of theory to explain our observations. The third element is the testing of the theory developed through the collection of evidence. The fourth element is the statement of principles based on the conclusions we derive from the testing of theory. The final element is the application of economic principles through actions designed to impact on future observations. A short answer or problem question, involving at least one of the elements of the discipline, assesses the student’s understanding by requiring the student to construct a correct response to the question. Marking criteria The correctness of your responses to each question will determine your mark for Part A of Assignment2.
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