Consider an economy that is operating at its potential GDP (that is, GDP is on trend) and the inflation rate is at the target rate. Suppose that the Australian economy is hit by two shocks: a decrease in consumer confidence and an increase in financial friction. Assume that it is known that both shocks are temporary and will only last for 1 period.

(a) Describe what happens in the economy in the current period using the standard IS-MP and Phillips curve analysis, assuming no policy response from the RBA. What would happen in the next period? Use graphs in your answer.

(b) Based on your answer in a) how would the RBA respond to these shocks in the current period and in the next period? Use graphs in your answer.

(c) In part (b) are there any limits to the RBA response?

Please help with some of this :))