c)At various times, much of Australia's fruit crops have been destroyed due to bushfires. The scale of destruction has been sufficient to cause increases in the rate of inflation. Explain what type of inflation this would be classified as. Do you think the inflation rates at such times are entirely accurate? Briefly explain.

d)During the spring of 2015, the United Kingdom experienced a brief period of deflation. According to an article in The Wall Street Journal, 'The UK's history of sticky and hard-to-control inflation suggests that a short period of falling prices will be taken as a reprieve for consumers, not as a signal to defer purchases' (Barley, 2015).

Why might consumers see deflation as a 'signal to defer purchases'? Shouldn't lower prices cause consumers to buy more, not less? Briefly explain.

e)In the following graph, suppose the Australian economy moves from point A in year 1 to point B in year 2. Using the graph, briefly explain your answers to each of the questions.

(i)What is the growth rate in potential GDP from year 1 to year 2?

(ii)Is the unemployment rate in year 2 higher or lower than in year 1?

(iii)What is the inflation rate in year 2?

(iv)What is the growth rate of real GDP from year 1 to year 2?

LRAS1 LRAS2 Price level SRAS1 SRAS2 114 B 112 AD2 AD L 0 $1120 1140 1160 Real GDP (billions of dollars)