Question 2 DAS-DAD Model [16 points] Dynamic ASAD model. The current recession caused by the COVID19 pandemic has reduced demand for Australian goods. Your task is to understand how this adverse aggregate demand shock affects the Australian economy and the use of monetary policy in stabilizing the economy. You will use the Dynamic Aggregate SupplyAggregate Demand model (developed in Lectures 10, 11 and 12) to analyze this scenario. For simplicity, suppose the natural level of output is constant. Each period in the model lasts a year. Interest rate and ination are expressed in percentage points. The parameter values of the model are provided in Table 2 below. l7 50 gb 0.60 77* 2 91: 1 p 2 6y 0.30 a 1 Table 2: DASDAD model Benchmark Parameter Values (4) Suppose the RBA decides to respond more aggressively to output gap by setting Or = 0.3 and Oy = 1. Keeping all other parameters as in Table 2, recompute the time paths of output, inflation, nominal and real interest rates for 50 years after the initial demand shock (t = 0, 1, ..., 50). Explain how the policy change affects the time paths of inflation, output, nominal and real interest rate. Is there a policy tradeoff between inflation and output? Explain. (3 points) For the remainder of this question consider the implications of a modified version of the dynamic AS-AD model, where people's inflation expectations may be subject to random shocks