Using well-labelled graphs for the IS-LM, WS-PS and AS-AD models:

a) Assume that the Australian government decides to decrease unemployment benefits in order to reduce its budget deficit, explain how equilibrium output might change in both the short run and medium run.

b) Assume that the RBA decides to increase its price target, analyse how the economy would adjust to a medium-run equilibrium.

c) Would your answer to (b) change if the economy was in a liquidity trap? Explain.

d) Suppose the central bank tries to persuade everyone that it will maintain the interest rate very low (close to 0) for the next few years, thereby lowering people's expectations of future interest rates. Explain what the effect would be today on equilibrium output.