A new prime minister, who promised during the election campaign that she would cut government expenditure (G), has just been elected. People trust that she will keep her promise, but that the G decreases will be implemented only in the future. Determine the impact of the election on current output, the current interest rate and current private spending, under each of the following assumptions. (In each case, indicate what you think will happen to Y’e , r′e and G′ e , and then how these changes in expectations affect output today.)

a. The RBA decides not to change the interest rate.

b. The RBA decides to prevent any change in future output.

c. The RBA decides to prevent any change in the future interest rate.

d. The RBA acts very strongly to keep inflation at its target rate.