Question A)

Assuming ceteris paribus, explain using the macroeconomic model how you would expect the current monetary policy to affect the GDP components (consumption, investment, net exports), employment, inflation, and the Australian dollar (i.e. the exchange rate).

Question B)

Given the state of the economy (i.e. proximity to full- employment) and the nature of the shocks (i.e. demand or supply), comment on whether current monetary policy will be effective in reducing inflation and whether this will lead to big costs in terms of lost output and employment.