Question 1

Using the dynamic aggregate demand and aggregate supply model, illustrate and explain the impact of following policy decisions on income, unemployment and inflation in Australia in both short-run and long-run.

Part (a)

The Commonwealth Government is giving tax cuts and incentives for purchasing electric vehicles.

Part (b)

Now say, the Reserve Bank of Australia (RBA) is contemplating a suitable policy action to improve the household spending. Explain and illustrate what policy stance should the RBA take and how would that remedy the problem.