You are required to write an individual essay (maximum: 2,000 words) based on the question noted below. You are required to note at the end of your work an accurate word count. Failure to adhere to these two rules may result in you losing marks. Essay Question a) Following the Brexit referendum in June 2016, the UK is in a transitionary period and will leave the EU by December 2020. Most economists hold the view that exiting the EU may have a permanent aggregate demand (AD) shock on the UK economy, but they are divided on whether the AD shock will be positive or negative.
In your view will this permanent AD shock be positive or negative? Provide reasons for your answer (Hint: Your discussion should focus on only potential autonomous changes in consumption and/or investment which may shift the IS curve). (30 marks)
Note: There is a possibility of a no AD shock but this is not the focus of the coursework
b) Following your answer in (a), use the IS-PC-MR model and the impulse response functions, and on the assumption of a closed economy (starting from the equilibrium with an inflation target), to illustrate how the Bank of England (BoE) may adjust to this permanent aggregate demand shock under both firmly anchored (χ = 1.0) and partially anchored (χ = 0.5) inflation expectations. (70 marks)
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For a brief on Brexit, you may read the following and other relevant publications:
Aichele, R. & Felbermayr, G. (2015), Costs and benefits of a United Kingdom exit from the European Union, Global Economic Dynamics (GED). Available at https://ged
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project.de/wp-content/uploads/2015/04/Costs-and-benefits-of-a-United-Kingdomexit-from-the-European-Union.pdf, accessed: 20/02/20120.
Begg, I. and Mushövel, F. (undated), The economic impact of Brexit: jobs, growth and the public finances (Summary), European Institute & London School of Economics. Available at: http://www.lse.ac.uk/europeanInstitute/LSE-Commission/Hearing-11–The-impact-of-Brexit-on-jobs-and-economic-growth-sumary.pdf, accessed: 20/02/2019.
Sampson, T. (2017), Brexit: The economics of international disintegration, Journal of Economic Perspectives, 31 (4): 163 – 184
