Answer each part by using well-labelled graphs for the IS-LM, WS-PS and AS-AD models:
a) Assume that Australian government has made it very difficult for refugees (who are prepared to
work at lower wages) to obtain work permits to enter the workforce. Explain how natural rate of
unemployment would change. (8 marks)
b) Assume that the RBA decided to increase its price target, analyse how the economy would
adjust to a medium-run equilibrium. (8 marks)
c) Would your answer to (b) change if the economy was in a liquidity trap? Explain. (7 marks)
d) Suppose the RBA tries to persuade everyone that it is necessary that the Bank to decrease the
cash rates. This would decrease people's expectations of future interest rates. Explain what the
effect would be today on equilibrium output.