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 Federal Government is lowering taxes to help people navigate the higher cost of living.

Part (b)

The Reserve Bank of Australia (RBA) is closely monitoring the high inflationary pressure due to a surge in demand in the post-COVID situation and contemplating a suitable policy action. Explain and illustrate what policy stance should the RBA take and how would that remedy the problem.