ECS3709
Assignment 3 Semester 2 2026
Unique number:
Due date: September\ 2026
Question 1 [5 marks]
(i) Symbol: vt > 0
Name: Adverse supply shock, specifically a positive cost-push or oil-price shock.
Explanation: An unexpected rise in crude-oil prices increases firms’ production and
transport costs. In the dynamic aggregate-supply equation πt = πt−1 + φ(Yt − Ȳt) + vt,
a positive vt raises inflation at a given output gap.
, Question 1 [5 marks]
(i) Symbol: vt > 0
Name: Adverse supply shock, specifically a positive cost-push or oil-price shock.
Explanation: An unexpected rise in crude-oil prices increases firms’ production and
transport costs. In the dynamic aggregate-supply equation πt = πt−1 + φ(Yt − Ȳt) + vt,
a positive vt raises inflation at a given output gap.
(ii) Symbol: Yt − Ȳt > 0 or ỹt > 0
Name: Positive output gap, also called an inflationary gap.
Explanation: During a boom, actual output exceeds the economy’s natural or
potential level, so Yt Ȳt.
(iii) Symbol: πt*
Name: Inflation target.
Explanation: The South African Reserve Bank operates an inflation-targeting
monetary-policy framework. The symbol πt* represents the inflation rate targeted by
the central bank.
(iv) Symbol: πt−1
Name: Lagged inflation, or previous-period inflation.
Explanation: If the current year is 2026, inflation for 2025 is the previous period’s
inflation, written as πt−1.
(v) Symbol: rt = it − Etπt+1
Name: Expected or ex ante real interest rate.
Explanation: Using the Fisher relation, the expected real interest rate equals the
nominal interest rate minus expected future inflation. Therefore, rt = it − Etπt+1.
Assignment 3 Semester 2 2026
Unique number:
Due date: September\ 2026
Question 1 [5 marks]
(i) Symbol: vt > 0
Name: Adverse supply shock, specifically a positive cost-push or oil-price shock.
Explanation: An unexpected rise in crude-oil prices increases firms’ production and
transport costs. In the dynamic aggregate-supply equation πt = πt−1 + φ(Yt − Ȳt) + vt,
a positive vt raises inflation at a given output gap.
, Question 1 [5 marks]
(i) Symbol: vt > 0
Name: Adverse supply shock, specifically a positive cost-push or oil-price shock.
Explanation: An unexpected rise in crude-oil prices increases firms’ production and
transport costs. In the dynamic aggregate-supply equation πt = πt−1 + φ(Yt − Ȳt) + vt,
a positive vt raises inflation at a given output gap.
(ii) Symbol: Yt − Ȳt > 0 or ỹt > 0
Name: Positive output gap, also called an inflationary gap.
Explanation: During a boom, actual output exceeds the economy’s natural or
potential level, so Yt Ȳt.
(iii) Symbol: πt*
Name: Inflation target.
Explanation: The South African Reserve Bank operates an inflation-targeting
monetary-policy framework. The symbol πt* represents the inflation rate targeted by
the central bank.
(iv) Symbol: πt−1
Name: Lagged inflation, or previous-period inflation.
Explanation: If the current year is 2026, inflation for 2025 is the previous period’s
inflation, written as πt−1.
(v) Symbol: rt = it − Etπt+1
Name: Expected or ex ante real interest rate.
Explanation: Using the Fisher relation, the expected real interest rate equals the
nominal interest rate minus expected future inflation. Therefore, rt = it − Etπt+1.
