(a)"When the interest rates in Australia increase Australian dollar tends to depreciate relative to other currencies. This happens because the borrowing costs in terms of AUD are now higher and, as result, economic agents will tend to minimise their holdings of AUD." (3 marks)

(b) "If inflation increases across developed economies, Central Banks of these countries will respond by increasing their target interest rates. This in turn will make firms' returns on investment more attractive and will lead to an increase in investment and aggregate demand in the economy, pushing the price level even higher. This vicious circle is one of the reasons why monetary policy is ineffective in the current economic environment." (3 marks)

(c) "Suppose the New Zealand government decides to impose a per litre tax on milk production to compensate for the environmental damage that arises due to the excessive use of soil fertilizers by dairy farmers.

This policy will increase the marginal cost of milk production and will shift the supply curve of milk to the left.

The resulting increase in price will lead to a decrease in demand for milk. The demand curve will consequently shift to the left, thereby decreasing the equilibrium price.

Therefore, the effect of the output tax on the final price of milk is uncertain. It is possible that the price of milk will decrease as the result of the policy." (3 marks)

(d) "The use of intellectual property rights (e.g. patents) to protect new innovations results in a temporary decrease in social welfare due to market monopolisation. Patents however are crucial for encouraging the innovation process due to the public good nature of most of the inventions." (3 marks)