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DEGES NINGTIAS 1210514016 INTERNATIONAL ECONOMICS EXERCISE 1.

As the impact of increasing in price gasoline on previous months ago, inflation in Indonesia is higher than Bank Indonesia expectation (before Bank Indonesia expect that increasing price gasoline will create 7.3% level of inflation, however in fact today our inflation is about 8.32%). So, as the response to solve this problem BI do tight monetary policy by increasing BI rate into 25 basis point or becomes 7.75 percent. a. Based on brief case summary above do you think tight monetary policy is appropriate or not to reduce inflation in Indonesia? (hint: correlate with causes of inflation) b. What happens to aggregate demand curve? c. What happens to the level of output and the price level in short run and in the long run? (explain by using SRAS and LRAS) d. According to Okuns law, what happens to unemployment in the short run and in the long run? (Hint: Okuns law is the relationship between output and unemployment) e. What happens to the real interest rate in short run and in long run? (hint: use fisher equation) 2. The majority of both monetary and fiscal policy is to ensure the stability of macroeconomic variables, especially price and output stability. In this case, BI as the monetary creator cares only about keeping price level stable, and government as fiscal creator cares only about keeping output at their natural rates. Explain how both parties respond towards: a. Decrease in velocity of money. b. Increase in price of gasoline. c. By ignoring roles of fiscal policy in this context, please explain what is the trade off between price stability and level of unemployment by using Philips curve. Do you think Philips curve also applied in long run?

c . Dengan mengabaikan peran kebijakan fiskal dalam konteks ini , tolong jelaskan apa adalah " trade off " antara stabilitas harga dan tingkat pengangguran dengan menggunakan kurva Philip . Apakah Anda pikir kurva Philip juga diterapkan dalam jangka panjang ? 1. a. Tight monetary policy will have an impact, especially in order to dampen price increases or inflation is excessive, so that the pressure on the balance of payments is reduced because of domestic products can compete again, although this policy is likely to impact the decline economic growth, because the amount of money in circulation is reduced, which reduced demand also means reduced production.

Effectiveness of monetary policy is, the extent to which monetary policy pursued by the government (in any form), gives positive impact on the economy and society, in the sense of: a. can increase economic growth b. can improve the welfare of society c. can improve employment opportunities d. can increase the revenue of the country e. as well as an influence on other macro policy Tight monetary policy (tight money policy) to reduce / limit the amount of money in circulation. This policy is done by the time the economy experienced inflation. Monetary policy aims to achieve economic stablisasi which can be measured by: - Job Opportunities. The greater passion for trying, it will lead to increased production. Increased production will be followed by the need for labor. This will mean an increase in employment opportunities and kesehjateraan employees. - price stability. If the price kestablian kepercyaan achieved it will cause in society. People believe that the goods they buy now will be the same as the price that would be the future. - Balance of International Payments. A balanced international balance of payments shows a country's economic stabilization. In order for a balanced international balance of payments, the government often conduct of monetary policy. b. Monetary policy (monetary policy) is a policy aimed at directing the macro economy to the desired condition, with a set amount of money in circulation. Tight money policy (contractionary monetary policy) will reduce the amount of money circulating in the community. It is probable that this will reduce the aggregate purchasing power. So, AD curve shifts to the left. The reverse expansionary monetary kebikajakan will increase the amount of money in circulation. This caused the AD curve shifts to the right (shifting).

Cause of monetary policy :

c. Price level

LRAS

SRAS

Real GDP In short run, nominal interest rates should fall because financial institutions have more funds to lend AD out because people have sold their Treasury to the Fed. The average price level increase because the increase in demand can be met only if firms have the incentive to produce more. An increasing price level provides this incentive. d.

Real GDP

Okun's law. For every 2 percent decline in GDP related to potential GDP, the unemployment rate increased by about 1 percent. Okun's law is a negative relationship between unemployment and GDP. Okun's law is a reminder that the factors which determine the business cycle in the short term is very different from the factors that shape the long-term economic growth. Okun's Law (Okun's law) is a negative relationship between unemployment and Real GDP, which refers to the decline in unemployment is associated with a 1 percent additional growth in Real GDP is closer to 2 percent. e. The quantity theory and the Fisher equation together tell us how money growth affects the nominal interest rate. According to the quantity theory, the increase in the money growth rate of one percent causes a 1% increase in the rate of inflation. According to the Fisher equation, a 1% increase in the rate of inflation will cause a 1% increase in the nominal interest rate. Here is the exact link between the two equations: Equation quantity in percentage change form and the Fisher equation. % Change in M +% Change in V =% Change in P +% change in Y % Change in M +% Change in V = p +% change in Y i=r+ p

2.a. The most commonly used way is to provide economic stimulus in the form of liquidity assistance to the business sector. Thus the expected economic activity re-spins. The government can also cut taxes and increase spending to stimulate the economy itself. Of the Central Bank, the government can also increase the circulation of money in the community by buying private sector debt securities and trade them in for cash. Moreover, it also can be done by cutting interest rates. However, as described above, the interest rate cut is not a real way out but just a temporary treatment to stimulate the economy and expect prices to move up by itself. b. Government efforts: Development of alternative energy Tightening the distribution and monitoring of fuel usage to fit the intended It should be no transfer of subsidy to finance the exploration and exploitation of alternative enegeri. Another solution is that the budget should be allocated for fuel subsudi to build its own refinery. Utilizing some of the budget for subsidies to labor-intensive projects and activities revolving fund for the poor in productive economic activities Specifically to support productive economic enterprises can use the pattern of the program 'Wine Red' (the budget for the people to prosper)

Fiscal policy: - Expenditure Reducing - Increasing of tax Monetary policy: 1) 2) 3) 4) 5) Disconto politic Open Market Policy Incresing Cash Ratio Selective Credit Control Margin Requirements

c. The Short-Run Tradeoff Between Inflation and Unemployment :

In the short run, inflation and unemployment are negatively related. At any point in time, a policymaker who controls aggregate demand can choose a combination of inflation and unemployment on this short-run Phillips curve. The short-run tradeoff between inflation and unemployment depends on expected inflation. The curve is higher when expected inflation is higher.