Question

Consider the fact that since 2015 till the end of 2017 the central bank of Russia managed to reduce the inflation rate drastically from 16%, keeping it within their target of 4%. Also, it has been noted that after two years of recession the economy started to grow in 2017. Some commentators viewed the decline in inflation as resulting from a deliberate policy of the central bank to be more aggressive in fighting inflation. Answer the following questions: (i) How can the policy reaction function be used to analyse the action of the Russian central bank? (ii) Using the AD-AS model outline the impact of the actions of the Russian central bank on the economy’s output in the short and long run.

Answer 1