1) Describe how the Reserve Bank of Australia uses open market operations to change short- term and long- term interest rates.
2) Explain how a decrease in the tax rate on interest earned on savings would affect savings, investment, the interest rate, and economic growth?
3) Explain how monetary policy affects aggregate demand, the price level and real GDP.
4) Use the dynamic aggregate demand and aggregate supply model to explain what monetary policy stance the Reserve Bank of Australia should take if the economy is entering a period of high inflation.
5) Assume that the economy is in the state described by the following table.
|
Year
|
Potential GDP
|
Real GDP
|
Price Level
|
|
1
|
$1020 billion
|
$1020 billion
|
100
|
|
2
|
$1080 billion
|
$1060 billion
|
103
|
Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2, assuming that no policy is pursued. Then illustrate the appropriate fiscal policy to use in this situation. Assume that the policy results in the economy producing at potential GDP. Provide an explanation.
6) Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model. Clearly show and identify the impact of the tax change. Show what happens to the price level and real GDP because of the tax change.
7) Suppose the economy is in the state described by the following table.
|
Year
|
Potential GDP
|
Real GDP
|
Price Level
|
|
1
|
$1100 billion
|
$1100 billion
|
100
|
|
2
|
$1150 billion
|
$1170 billion
|
109
|
What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and supply graph to illustrate the appropriate fiscal policy to use in this situation.