Due to inflation in Australia in December 2019, the price for petrol increased from AUD 1.35 to AUD 1.45. This caused petrol consumption to decrease from 2500 litres to 2450 litres at a 7-Eleven Petrol Station in Sydney.

Also, when the price for Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle) increased from AUD 950.00 to AUD 990.00; demand for these air conditioners fell from 2500 units to 2000 units.

Following this condition, answer the questions below.

i. Using the mid-point formula calculate the price elasticity of demand for petrol and Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle).

ii. Is the price elasticity of demand: elastic, unit elastic or inelastic for each commodity (petrol and Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle)?

iii. Suppose the government decides to increase tax for petrol and Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle). Use two diagrams to explain the incidence of the tax increase for each commodity.

2.

The government of Australia has embarked on various policies such as Job Keeper and provision of subsidies to firms in order to reduce the severity of COVID 19 on the economy. Suppose the money supply expands such that the Reserve Bank predicts that the economic expansion is not sustainable.

Use two diagrams one for the money market and another for the goods and services (Aggregate demand and Aggregate Supply model), to explain the policy that the Reserve Bank can adopt in order to overcome the effect of increasing money supply on the economy.

Assume that:

money supply increased from the equilibrium of AUD 40 billion to AUD 70 billion

Interest was reduced to interest rate of 1.5% as part of the stimulus package for the nation to overcome the effects of COVID 19. But the equilibrium interest rate is 4%

Assume that equilibrium real GDP is AUD 60 billion

Assume that inflation during COVID crisis was at equilibrium price of CPI 65

Assume that to overcome the inflationary crisis aggregate demand has to

reduce by AUD 30 billion.

Assume to restore the economy to equilibrium inflation has to be adjusted to

CPI 120

3.

i. Use two diagrams to explain the effects of the determinants of aggregate demand on real GDP in a nation.

ii. Suppose there is an expectation of a rapid general price increase in goods and services in Australia in January 2021. Examine the effects of the anticipated general rapid increase in price for goods and services