a) China is one of the fastest growing economies in the world and is one of Australiaâ€™s major trading partners.Â Discuss the implications for the Australian economy of a weakerÂ than expected Chinese economy in 2016. Illustrate your arguments with the AS-AD model. (30 marks) Â
b) Using an appropriate model, explain how a weakening Chinese economy might affect the value of the Australian dollar.Â Note that Australia has a flexible exchange rate system.Â (10 marks) Â
Question 2.Â Â
Assume that another drought in Australia this summer sharply reduces Australiaâ€™s exports of wheat and other agricultural commodities and causes a recession. Â
a) Could government expenditures with taxes held constant, eliminate the recession? Use the Aggregate Expenditure model to illustrate your arguments. (10 marks) Â
b) Explain why such government intervention may be necessary, at least in the short term.Â (10 marks) Â
Question 3Â Â
a) Assume that Australiaâ€™s inflation rate is above normal range (i.e. 2-3%). Is this cause for concern? Critically evaluate the actions that the Reserve Bank of Australia can take to reduce inflation back to its normal range. (30 marks) Â
b) Discuss the impact of an open market operations on liquidity in the monetary sector of the economy.
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