1)The Loans Market Assume (i) consumption is an increasing function disposable income and a decreasing function of the real interest rate, (ii) investment is a decreasing function of the interest rate

1)Please use this google drive link to download the answer file.       

https://drive.google.com/file/d/1T5qsvx_OF1xmGfcv8yqoVtwh7kN9l9H_/view?usp=sharing

Note: If you have any trouble in viewing/downloading the answer from the given link, please use this below guide to understand the whole process. 

https://helpinhomework.org/blog/how-to-obtain-answer-through-google-drive-link 

2)

(a) The BOT needs to implement a contractionary monetary policy to reduce the inflation i.e. it needs to lower the supply of money in the system.

(b) BOT should increase the reserve requirements of the bank thus making sure that the money supply is reduced.

BOT should increase the BIBOR such that there is a disincentive to withdraw the money from the system thus reducing inflationary pressures.

BOT should sell the government bonds in the market through open market operations.

(c)

(d) The cost of disinflation in an economy is majorly on the loss of output and employment as shown by the above figure. Increasing interest rate or selling bond through open market mechanisms to contain inflation in turn reduces investment in the economy which in turn reduces output, income and thereby employment.

According to the theory of rational expectations, the BOT can use such variables as expected inflation in their dynamical models to predict the effects so that any stickiness in unemployment and inflation can be modelled and thus framing policies in such a way as to reduce such short-run costs.

please see the attached file.for the complet solution.thank you

3)

Slow down in rate of inflation called disinflation. When demand of commodities dropped but supply remain unchanged then price of commodities die down due to more supply, disinflation shows its effect their. If price increased due to demand that is called demand pull inflation. There are many factors which determine magnitude of cost of disinflation. Some are as follows:

a. Level of unemployment - sometimes disinflation may be costly for an economy. Tail of in short run output increase unemployment level in economy. Unemployment level is the main factor to determine the magnitude of cost of disinflation.

b. Sale of Government securities - By selling or purchasing of securities a government can control money supply in an economy. If govt wants to increse money supply to shrink disinflation, govt may have to sale some of its securities.

c. Business cycle - In business cycle, recession is a cause of disinflation. In recession, business experienced less demand and begin to loss money. To reduce this money loss firm starts expelling his employees, which increse unemployment rate.

Government should control on disinflation, otherwise it become a huge problem. For reducing the cost of disinflation, the central bank have many tools as follows:

- shrink CRR and SLR ( Cash reserve ratio and statutory liquidity ratio)

- open marketing operations

- drop Interest rates

- increase government spending

- cut the rate of taxes