assignment 2 topic: due on 9 october 2008 read the article below entitled “jobless low fuels inflation” (david uren, the australian, feb 21 2008) and answer all of the following questions: (please provide question numbers on your answer sheet): jobless low fuels inflation david uren, economics correspondent | february 21, 2008 the treasury department believes the unemployment rate has dropped to a level that is pushing up inflation. while treasury chief economist david gruen told a senate estimates committee yesterday it was not possible to be precise about what the tipping point was, & quot;the current rate of unemployment may be inconsistent with steady inflation & quot;. dr gruen''s comments yesterday came as new figures on wages showed a slow, steady increase, with those in the private sector rising at an annual rate of 4.3 per cent, the fastest in at least 10 years, and an increase from 3.8per cent a year ago.[….] & quot;you don''t need to be einstein to know you can''t keep doing that for ever, & quot; he said. ''at some point that process comes to a halt. as the unemployment rate has come down, the evidence of supply constraints has become more pronounced. & quot; dr gruen said the rba strategy of raising interest rates was the most effective method of bringing inflation under control, but budget cuts proposed by the rudd government would help. & quot;monetary policy responds quickly, and for that reason is our primary tool around demand management, & quot; he said. [….] dr gruen said that although tax cuts put more money into people''s pockets, adding to demand, it was important to look at the budget as a whole. & quot;if the government does as the prime minister says it would do, running a budget surplus of at least 1.5 per cent of gdp and, saving revenue surprises, that would be a material tightening of fiscal policy compared with the situation as we anticipated it, and that would make some contribution to reduce aggregate demand, & quot; he said. source: http://www.theaustralian.news.com.au/story/0,25197,23249132-2702,00.html accessed 21/2/08 QUESTIONS 1. Use an aggregate expenditure model to explain the drop in the unemployment rate on the assumption that it has been caused by the expenditure increases associated with rising consumer wealth and export spending (that is, the so-called ‘resources boom ‘). You should incorporate discussion of the multiplier effect in your answer. (10 marks) 2. Use an aggregate demand – aggregate supply model to discuss what is meant by “supply constraints” in the article. What factors would have to change in order for the economy to be free of such constraints? Explain you answer. (5 marks) 3. Use an aggregate demand – aggregate supply model to discuss how a growth in aggregate demand could result in demand - pull inflation when such “supply constraints” exist. (10 marks)