a) Suppose the level of output in the Australian economy currently lies below the level of potential output. Using our model of the AD-AS model, explain how in the long run the Australian economy would adjust assuming there is no intervention by fiscal or monetary policymakers. Be sure to provide the economic intuition for this result. (2 marks) I (b) Currently the interest rate that the Reserve Bank of Australia (RBA) targets is near record lows below 1 per cent. Explain why this limits the ability of the RBA to increase output via conventional monetary policy. In your explanation, make sure to discuss how monetary policy affects the behaviour of different sectors of the economy. (1 mark) (C) Suppose the Australian government increases the level of government spending. Explain how an increase in government spending impact upon the position of the AD and AS curves. Use a relevant diagram and explain your answer in detail. (2 marks) (d) What will be the impact of the increase in government spending on the level of output and inflation in the short run of the AD-AS model? What will be the impact on the level of output and inflation in the long run of the AD-AS model? For simplicity, assume that the economy is initially in a position where the level of output equals potential output and inflation equals expected inflation. (2 marks) (e) Continuing on from part (d), how will the different components of aggregate expenditure be affected by the increase in government spending? Analyse both the short run and the long run effect upon the components of aggregate expenditure. (2 mark)

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