The hypothetical information shows what the situation will be if the RBA does not use monetary policy (5 mark question)

Potential GDP $1,100 billion

Real GDP $950 billion

Price Level 104

a. If the RBA wants to keep real GDP at its potential level in 2016, should it use an expansionary policy or a contractionary policy? Explain clearly what kind of open-market operation would the RBA undertake to implement such policy stance and how that would affect interest rates

b. If the RBA's policy is successful in keeping real GDP at its potential level, state whether each of the following will be higher, lower or the same as it would have been if the RBA had taken no action

Real GDP

Potential GDP

The inflation rate

The unemployment rate

c. Draw an AD-AS graph to illustrate your answer.