The increasingly tense political conflict between Australia and China has impacted the traditional trade between the two nations. These include moves by China to impose a new anti-dumping tariff on barley, suspensions of certain beef imports and investigations into cheap Australian wine imports amid a coronavirus-led economic slowdown (South China Morning Post, 29/09/2020).

Assume that Australia is already experiencing recession due to the COVID-19 pandemic, bushfires, and drought. GDP has been dragged down particularly due to weak spending by households (a reduction in consumer confidence) and a significant reduction in investment (a reduction in business confidence).

1) Use the IS-LM and the AS-AD diagrams to illustrate the impact on Australia's output, the unemployment rate, the price level and the interest rate in both the short-run and the medium-run from a reduction in net exports due to the trade conflict between Australia and China. Explain your answers. (Note, Australia has a price target.)

2) Let's assume that the MPC in Australia is equal to 0.6 (c₁=0.6), the marginal tax rate is 0.3 (t=0.3), and the marginal propensity to import is 0.02 (m=0.02). What would be the impact of a $100m reduction in exports on output? Explain your answer by using the multiplier formula.

3)Let's assume that Australia has experienced a negative technological shock (a lower productivity) due to the COVID-19 crisis and the trade conflict between the two nations, Australia and China. Use the WS-PS model to explain how the natural rate of unemployment would change as a result of this decrease in the level of productivity (A).

4)Let's assume that the relationship between the inflation rate and the unemployment rate is described by the Phillips curve as follows: