Part 1/2 : The world price of oil has doubled from its value a year ago and could increase much more if there are significant reductions in the quantity of Russian. In recent years, Australia gradually reduced its domestic oil production capacity, becoming more reliant on imports of both crude oil and refined petroleum. Therefore, soaring the crude oil prices have had an inverse effect on the Australian macroeconomy. Using the AD-AS model, the graph below illustrates the state of the economy in 2021 and 2022.

a) Use the price level in 2021 as the base year, find the (expected) inflation in 2022 (5 Marks)

b) As the Reserve Bank of Australia (RBA) follows an inflation target of 2-3 percent, what monetary policy should the RBA implement in 2022 in order to achieve the inflation target. Detail what policy tools that RBA would use and how. (10 Marks)

LRAS Price level SRAS2022 with an adverse oil shock SRAS2021 120 110 104 100 90 AD2021/2022 without policy 1 1 1 1 AD2022 with a contractionary monetary policy 1 452 493 509 Real GDP (5 billions) LRAS Price level SRAS2022 with an adverse oil shock SRAS2021 120 110 104 100 90 AD2021/2022 without policy 1 1 1 1 AD2022 with a contractionary monetary policy 1 452 493 509 Real GDP (5 billions)