Macroeconomics Assignment -
Question - Suppose the following table illustrates the values of real and potential GDP if the Reserve Bank of Australia (RBA) does not change its current monetary policy to be more contractionary or expansionary.
|
Year
|
Potential GDP
|
Real GDP
|
Price level
|
|
2016
|
$1.42 trillion
|
$1.42 trillion
|
114
|
|
2017
|
$1.48 trillion
|
$1.46 trillion
|
116
|
a) If the RBA wants to keep real GDP at its potential level in 2017, should the RBA use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?
b) Briefly discuss the effect of a fall in the cash rate on consumption, investment and net exports.
c) Suppose that the RBA uses an appropriate policy and is successful in keeping real GDP at potential in 2017. Discuss the type of monetary policy that the RBA should adopt, explaining the effect of the policy on real GDP, the price level and employment. Use a dynamic aggregate demand and supply model to illustrate your answer.