Question: Derive the aggregate supply (AS) curve from wage setting and price setting behavior. Explain why an increase in output (Y) leads to an increase in

  1. Derive the aggregate supply (AS) curve from wage setting and price setting behavior. Explain why an increase in output (Y) leads to an increase in the price level (P). (4 marks)
  2. Briefly describe Taylor Rule in setting the interest rate. Using a diagram, show the output and employment situation when price stability occurs. (3 marks)
  3. Explain when and why the Reserve Bank of Australia would take an expansionary monetary policy. (3 marks)

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