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"Since November 2011, the Reserve Bank has lowered the cash rate on eight separate occasions from 4.75% to 2.5%. Clearly, the Bank has become far less concerned about inflation and is giving a much greater emphasis to unemployment in its policy reaction function"(South Western Tasmania Weekly News 3 September, 2013)
In the light of the quotation, assume that the economy is in long run equilibrium when the Reserve Bank of Australia decided to raise its inflation target and give greater emphasis to unemployment in its policy reaction function.
Use the aggregate demand - aggregate supply curve framework and the Reserve Bank's policy reaction function to explain this process and consider the likely consequences for the macro economy in both the short-run and the long run.
That is, explain the effect of this change in policy by the Bank on real GDP, unemployment and the rate of inflation in both the short - run and the long - run.
What will be the effect of this change in policy on both the real and the nominal interest rate in the long - run?
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