The central bank of Rosewater targets inflation by following the Taylor rule. For each of the following scenarios, explain and show graphically (using the AS-AD diagram) whether the policy will have a beneficial, harmful or uncertain effect. For each case, assume that Rosewater was in a long-run equilibrium before the scenario occurs. (Carefully label your graph)

a) Rosewater's top trading partner greatly increases their demand for Rosewater's products. Draw the graph and explain whether the policy was beneficial, harmful or uncertain.

b) Labour force participation rates are falling in Rosewater. Draw the graph and explain whether the policy was beneficial, harmful or uncertain.

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