Q1)

"Inflation in Australia has increased significantly," said the RBA governor, Philip Lowe, in a statement. "While inflation is lower than in most other advanced economies, it is higher than earlier expected. "Inflation is expected to increase further, but then decline back towards the 2% to 3% range next year," Lowe said. "Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago."

What should be the monetary policy stance that the RBA can implement to control inflation? (0.5 marks). Use the dynamic aggregate demand and aggregate supply model to explain the effects of the monetary policy of the Reserve Bank of Australia according to the statement mentioned above. (4.5 marks)

Q2)

"Another reason not to worry is that part of the debt we're accumulating is a choice endorsed by economists, who advise the use of "counter-cyclical fiscal policy". That is, to spend even more money and cut taxes during a downturn, to help get the economy back on track".

What is meant by an economic downturn? (0.25 marks) Use the dynamic aggregate demand and supply model to explain the economic situation and the effects of the fiscal policy stance mentioned in the statement above. (4.75 marks)