Answer the following:

Question 4 on Topics 6 & 8 (15 marks) (a) Inflation is above the target range set by the Central Bank of Gravisa, and is of concern to its board, who feel compelled to act. (i) What does this tell you regarding the likely output gap? Illustrate it using an AS- AD diagram, and briefly explain your diagram. (5 marks) (ii) Explain the process of what happens to the economy in the long-run if the central bank does not intervene (assume also that the government does not intervene). Amend the AS-AD diagram drawn in part (i) to illustrate your answer. (5 marks) (b) Low interest rates are guaranteed to boost consumption in a severe recessionary environment such as that faced by the Australian economy during the COVID-19 lockdown. Do you agree or disagree with this statement? Provide two reasonings to justify your answer. (5 marks) References