Question

1. Inflation and the Australian Economy The Australian Bureau of Stat tistics recently reported that there was no change in consumer , equating to a quarterly inflation rate of 0%. The Reserve Bank of Australia has highlighted their concerns that inflation has been prices between the start of Jan uary and end o rch consistently lower than their target range of inflation. a) Why would the RBA consider inflation that is too low to be problematic for the Australian economy? b) What measure could the RBA implement to bring the inflation rate back to within their target range of 2 to 3%" Using the ADAS model, explain how this measure impacts the economy in the short run, detailing the impact to output, inflation and unemployment c) Using the ADAS model, explain how the economy will adjust in the long run. Compare the new long run equilibrium against (1) the initial long run equilibrium and (i) the short run equilibrium in terms of output, inflation and unemployment. (5 marks)

Answer 1

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