Great Moderation

Question 1

Great Moderation key features

Answer 1

From 1990 to 2007

1. unemployment and inflation fell, then remained stable.
2. real and nominal currency appreciation
3. real wage and productivity growth.
4. Strong growth in retail sales.

Question 2

Supply side reforms UK

Draw graph

Answer 2

Supply side hypothesis:
Weaker trade unions and reduced worker bargaining shifted the WS and ERU curves outwards, leading to higher output.

PS curve also shifts up because of increased product market competition, also shifting ERU curve out.

Resulted in higher wages, but is flawed bc it assumes a real depreciation, when in reality the UK experienced a real and nominal appreciation.

Question 3

Demand Side reforms UK

Draw graph

Answer 3

AD boom lead to real appreciation and trade deficit.

There was a consumption boon, fuelled by the fact that the appreciated exchange rate encouraged consumption as real wage was higher. There was also a fall in savings and credit constraints.

Strong household price growth also allowed for greater spending as ppl could borrow against their housing.

Question 4

Draw the synthesis diagram.

Answer 4

Outward shifts of BT, AD and ERU curves resulting in appreciation and higher output.