1. Since the Russian invasion of Ukraine in March 2022, oil prices have surged to multi-year highs. Higher oil prices af

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1 Since The Russian Invasion Of Ukraine In March 2022 Oil Prices Have Surged To Multi Year Highs Higher Oil Prices Af 1 (105.23 KiB) Viewed 11 times

1. Since the Russian invasion of Ukraine in March 2022, oil prices have surged to multi-year highs. Higher oil prices affect everyone: consumers, producers, exporters, and even governments. Write a short essay to explain the consequences of rising oil prices and the role of macroeconomic policy in responding to the surge in oil prices. In writing your answer, make sure to address the following points: i. Discuss the macroeconomic effects of the surge in oil prices. How do rising oil prices affect the demand side and the supply side of the economy. ii. Evaluate the policy options that the governments and central banks have at their disposal to manage the impacts of rising oil prices. Is there a trade-off between combating the rise in prices and stimulating economic activity? iii. Does it make a difference if the increase in oil prices is temporary or marks a permanent change? How would the persistence of the oil price shock matter for macroeconomic policy? 2. Many central banks have an explicit target value or range for inflation. Current inflation targets typically lie in the range of 1 to 3 percent per annum. Following the GFC in 2007/8, some economists called for raising their inflation targets to 4 to 5 percent as a way of reducing the risk of hitting the zero lower bound for the policy interest rate such as cash rate. Write a short essay to explain the rationale behind inflation targets and their relation to hitting the zero lower bound. In writing your answer, make sure to address the following points: i. If inflation has economic costs, why don't central banks have a target of zero inflation? ii. How does a higher inflation target help to reduce the risk to a central bank of hitting the ZLB? [Hint: Use the Fisher effect]