Answer to Question #202632 in Macroeconomics for Sara

Question

In a recent article on BusinessLive, Duma Gqubule argues that South Africa does not have a real central bank. He criticises the conduct of monetary policy and puts forward a range of proposals under the umbrella term monetary finance. 

2. Represent Gqubule’s reasoning using the AD’-PC model from chapter 7: 2.1 The Covid-19 lockdown as a supply shock only. (6) 2.2 His monetary policy proposals. (6) 2.3 His proposals for what to do when too much money is created.

(all on a single graph, with explanations, please)

Answer 1

The covid 19 lock down results in a higher inflation rate. Given the inflation rate, the central ban responds by choosing real interest rate which determines the unemployment rate through the IS curve. When inflation rate is high the government reduces money supply, interest rates increase and unemployment increases too.