Assignment 2
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This assignment covers the following topics:

  • Monetary system (Chapter 10)
  • Inflation: its causes and costs (Chapter 11)
  • Aggregated demand and supply (Chapter 14)


  1. This assignment contributes to 20% of the overall marks for the course.
  2. Only a single submission permitted (hence, please ensure to attach the file version of the assignment)
  3. Use and Submit this template only and Write your answers in each question below for your submission – any other form of the file is NOT accepted (Failing to do so will automatically mean zero mark for this task).
  4. The recommended browsers when uploading the file are Chrome, Firefox or Explorer (some have suggested that Safari might not work well).
  5. The font size has to be at least 12.
  6. Explain your answers, but be succinct.
  7. Label each axis and explain the diagram that you use carefully (if any).
  8. Show all of your working in order to get partial credits.
  9. After the due date any late submission will be marked as ‘late’. A penalty of 10% of the allocated marks (i.e., 2 marks) per day will apply for late submissions.
  10. A failure of your home computer (or any kind of the IT problem) cannot be a reason for the late submission (all requests for an extension of this nature will be rejected immediately).
  11. Make sure you have included your student ID and name in the front page of the assignment
  12. Working with other fellow students is strongly encouraged. However, you cannot just copy your friend’s answers. If we find out this, you will be harshly punished for the academic plagiarism. See ‘students responsibilities’ at RMIT’s policy on this:

Short Answer Questions (answer in the space provided below):

  1. Review the chapter on inflation and answer the following questions.


  1. Why do some economists claim that we should not worry too much about inflation? (2 marks)


  1. Other economists think that there are significant costs associated with inflation above 2-3%. What are they? Briefly discuss (2 marks)


  1. According to new legislation, all workers can earn the same wage specified in the annual contract which they sign on 1st January no matter what happens to prices of final goods and services during that year. This year, the prices of final goods and services fall unexpectedly after the contract has been written on 1 January. In this exercise you must illustrate what happens in the economy in the following AD-AS figure in the short-run. We assume that the economy starts at potential output, depicted in point A below.


  1. (3 marks) Start from Point A, demonstrate how the quantity of aggregate output supplied responds to the fall in prices of final goods and services using the figure below? Explain your answer.
  2. (3 marks) Start from Point A, demonstrate what happens when firms and workers are permitted to renegotiate their wage contracts? Explain your answer.

Answer here (Tips: Copy the below figure and use it to answer the questions. To create new lines, simply copy the existing curves and move to the new location)


 ****A Fun space************
Tired? Have a break with this movie trailer
Again, this has nothing to do with this assignment…Just promoting the ‘made in japan’!
*****now back to the question

  1. We studied how the Reserve Bank of Australia (RBA) can influence the money supply in the Australian financial market. Answer each question briefly.


  1. How does the open market operations increase the number of dollars in circulation? (2 marks)


  1. How does the reserve ratio influence the money supply? (2 marks)


  1. What do you think happens to the money multiplier (M) in a financial crisis and what is the likely impact of change in M to the economy? (2 marks)


  1. Name the movies which are based on the financial crisis (1 mark!). We had many crises, so you must be able to name more than one movie!

  1. (3 marks) Have a look at the following article,
Supposing the Australian economy is heading for a recession, what should (or can) the current government now do to deal with this? Use the economics knowledge that you have acquired in this course so far to elaborate your discussion. You need to write at least half a page in length (please do not use bullet points). Note that presenting a list of reference is preferred. But not required.

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