Policy change on output and inflation

PART 1 (20 marks)
The RBA has changed the stance of monetary policy since August 2013 and has since made further changes to the cash rate, most recent change taking place in May 2015, please refer to the following link: http://www.rba.gov.au/media- releases/2015/mr-15-08.html.
A. Use a diagram and the quantity theory of money to describe the effect that this change in monetary policy should have had on the price level in Australia since August 2013. (15 marks)
B. Use a diagram to illustrate and explain the effect this change would have had on Aggregate Demand and output in Australia. (5 marks)

PART 2 (10 marks)
In the Australian 2015 Federal Government Budget, several changes were announced. One of these changes has affected businesses, in particular small businesses, please see the following link: http://www.abc.net.au/news/2015-05-13/budget-2015-small-business-tax-break- explained/6466066.
A. Use the Aggregate Demand-Aggregate Supply diagram to illustrate the likely effects of this policy change on output and inflation. (10 marks)


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