Suppose the Following Table Illustrates the Values of Real and Potential

question 76

Essay

Suppose the following table illustrates the values of real and potential GDP and the price level,if the Reserve Bank of Australia (RBA)does not change its current monetary policy to be more contractionary or expansionary.
Suppose the RBA uses an appropriate policy and is successful in keeping real GDP at potential in 2013.Discuss the type of monetary policy that the RBA should adopt,explaining the effect of the policy on real GDP,the price level and employment.Use a dynamic aggregate demand and supply model to illustrate your answer.

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Definitions:

Neoclassical Economics

An economic theory that focuses on how the perception of utility and costs influence the supply and demand equilibrium.

Complementary

Products or services that enhance or are used together with another, increasing the value or usability of either.

Self-interest

The pursuit of personal advantage and well-being, often driving economic decisions.

Neoclassical Models

Economic theories and models that focus on the determination of prices, outputs, and income distributions in markets through supply and demand, often under the assumption of rational behavior and efficient markets.