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Question 1

Using the Philips curve analysis in discussing the steps to be taken by the government to explain the relation between unemployment and the inflation rate when the rate of unemployment is increasing the government would use the curve bellow in highlighting the main reasons for taking the measure.  For instance, based on the take of the monetarist school, the government would control the inflation through the stabilizing the money credit. Initiation of credit policies would always reduce inflation which then causes shift in the short term run Phillips curve (Blanchard and Galí, 2007, P. 36).

An inward shift in the Philip curve is as a result of improvement of the economy hence this will help the government to reduce unemployment rate. In addition, the government may carry out structural reforms to reduce frictional and structural unemployment. This can be through increased incentives.  A fall in None accelerating Inflation Rate of Unemployment (NAIRU). The reduction of NAIRU has got implications in the setting up of interest rates. This would mean that the economy is able to operate at a lower rate of unemployment.

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b).

When there is a rise in the main input in production, the cost of production increases which then alters the rate of unemployment which also increases. In this case, the inflation rate will be increased as many people may not afford the high prices. Since very few people will be having money in circulation in the economy, this may have drastic effect in the economic status of the country. It may also have a negative effect by affecting the economy through simultaneous negative and positive influences. It is however preferred by many economists that the inflation rate should be lower in order to favor the production cost. The production cost due to high prices of oil will alter the value of the commodities hence the prices will lower the interest rates.  On the other hand, increased unemployment will also be very bad for the economy especially the young economy. The income level will be less and this could have negative effect on the economy of the country.

c).

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When the government takes a set of expansionary monetary and fiscal policy measures as the people takes adaptive expectations, there will be implications on the interest rates set by the monetary policy committee. The labor market will be able to operate with the set rates be it through the high interest rates. However, when the expectations are low, then the interest rates will be directly lowered through the given monetary policy (Clarida, Gali and Gertler, 1999, P. 25). In this case, there will be effect in the labor market which can still then operate under lower interest rates.

Response to Question 2

a).

Floating exchange rate which is also known as fluctuating exchange rate as adopted in China is able to allow the variation of the rates based on the international market. The Chinese Yuan will be able to increase in value because the rates will help in the stabilization of the monetary value.  This means that the currency of the China will be comparably stronger as they continue exporting the products manufactured from the flexible market. The market force will be very helpful in determining the rates and finally more stabilization of the currency.  The central bank of China will be able to set up the bands through which the rates should swing. These rates will be able to adjust the values at an appropriate time. There will be support of the Chinese currency to stabilize on cases that it does not meet the standard rates. There is also reinforcement on the national currencies through provision and support by the government by not allowing the Chinese currency not to go beyond a certain rate.

As a result of the flexible exchange policies, the levels of imports and export that will take place between China and USA will actually increase with time. The free floating effect will increase the foreign exchange volatility. According to some economists, this may have serious effect especially if the economies of China and USA are emerging ones.  There will be high liability dollarization, the balance sheet will be strong in this case and also there will be financial fragility between the two countries. These are possibilities but not authenticated that they must happen however they depend with the given economic status of the two countries. For instance, in cases when the liabilities are denominated on foreign currencies while assets in local currency, this will have the consequence of depreciation on the rate of exchange which then worsen bank and other corporate financial balances.

b).

The main factors affecting the exchange rates in an open economy are evident based on the following: The value of the imports is very important in determining the rates in most cases. This depends on the demand for the dollars and other foreign made goods and services. The variation will also take place whenever there is variation on the demand and supply of the currency at a given time (Abell, 1978, P. 53). The domestic input and output will defiantly help in the determination of the rates. In addition, a decrease in the value of the currency rates which is the domestic interest rates is also having effect in the exchange rates. Increase or decrease in the foreign interest rates also has an effect in the rates. This w ill effectively lower or increase the exchange rates respectively. There may also be a shift in the world demand. This may affect the domestic goods assets and other linked services to the country.

Question three responses

a).

The equilibrium level of national income is determined through the aggregate demand and supply of goods and services (Clarida, Gali and Gertler, 1999, P. 25).

 The aggregate supply of the goods depends on the on the productive capacity of a given country.

Y = E or Y = C+l+G

Y means national income

E for aggregate demand of - expenditure' on' good and services

C is the household consumption level. While I,   is the Investment demand

G = for Government, demand for the goods and other services.

Calculation of Y = 

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