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Australia's economy is in short-run equilibrium with an inflationary gap of $300 billion, and the MPS is 0.2. The expected inflation rate is 4%, and
Australia's economy is in short-run equilibrium with an inflationary gap of $300 billion, and the MPS is 0.2. The expected inflation rate is 4%, and the natural rate of unemployment is 6%.
- Based on the Phillips curve graph, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 4% in Australia? Explain.
- Assume the government takes no policy action in regards to Australia's economy.
- What will happen to the unemployment rate in the long-run? Explain.
- How will the long-run adjustment process be shown in the Phillips curve graph?
- Assume the government of Australia is considering using fiscal policy to address the inflationary gap.
- If the government chooses to decrease spending, calculate the minimum change in government spending required to decrease aggregate demand by the amount of the inflationary gap.
- How will the effect of the government's action in (3)(1) be represented in the Phillips curve model?
- Suppose the government wants to maintain a balanced budget and decreases both government spending and income taxes by $300 billion. Will this policy make the gap larger, smaller, or have no effect? Explain.
- Suppose the government chooses to only decrease government spending. Based on the loanable funds market, what will happen to the following?
- Price of previously issued bonds. Explain.
- Capital stock.
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