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MANAGERIAL ECONOMICS II
TUTORIAL QUESTIONS Chapter 36
Question 1
Best to Get Used to High Food and Energy PricesTheyre Here to
Stay
Rising energy and food costs are slowing the economy at a time when it is
already facing severe headwinds. Just as Western Europe and North America
are showing a bit of sparkle, along comes another oil price shock or food
price shock to put out the light.
On top of rising energy prices, a severe U.S. drought, a poor monsoon season
in Asia, and a bad harvest in Russia and Ukraine have sent grain prices
soaring. Globally, this is the third major food price shock in five years.
Source: The Telegraph, August 29, 2012
Explain what type of inflation the news clip is describing and provide a
graphical analysis of it.
Question 2
Use Figure 12.2 to answer Problems 2, 3,
4, and 5. In each question, the economy
starts out on the curves AD0 and SAS0.
Some events occur and the economy
experiences a demand-pull inflation.
a. List the events that might cause a
demand-pull inflation.
b. Describe the initial effects of a
demand-pull inflation.
c. Describe what happens as a
demand-pull inflation spiral
proceeds.

Question 3
Official: China May Face Heavy Inflation Pressure
China is expected to face great inflationary pressure in the future due to
higher costs and an abundant global money supply, a senior Chinese official
said in an article published Tuesday. He said inflation in China is also the
result of excessive global liquidity from loose monetary policies adopted by
developed nations, Chinas lending expansion, and a pile-up of outstanding
foreign exchange funds.
Chinas consumer price index (CPI), a main gauge of inflation, rose 4.9
percent year on year in February, the same level as in January. The CPI data
for March is scheduled to be released this week and is estimated to show a
rise above 5 percent.
Source: China Daily, April 12, 2011
i.
Is China experiencing demand-pull or cost-push inflation? Explain.
ii.
Draw a graph to illustrate the initial rise in the price level and the
money wage rate response to a one-time rise in the price level.
iii.
Draw a graph to illustrate and explain how
an inflation spiral.

China might experience

Question 4
Germany Leads Slowdown in Eurozone
The pace of German economic growth has weakened markedly, but the
reason is the weaker global prospects. Although German policymakers worry
about the countrys exposure to a fall in demand for its export goods,
evidence is growing that the recovery is broadening with real wage rates
rising and unemployment falling, which will lead into stronger consumer
spending.
Source: The Financial Times, September 23, 2010
i. How does exposure to a fall in demand for its export goods influence
Germanys aggregate demand, aggregate supply, unemployment and
inflation?
ii. Use the AS-AD model to illustrate your answer to part (a).
iii. What do you think the news clip means by the recovery is broadening
with real wage rates rising and unemployment falling, which will lead into
stronger consumer spending?
iv. Use the AS-AD model to illustrate your answer to part (d).