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Australia is a small, open economy with flexible exchange rate and unhindered capital mobility. Australia's

economy grew at an annualised rate of 3.8 per cent over the first six months of 2018, which is well above average, buoyed by strong contributions from the household sector and net exports. However, growth slowed significantly over the second half of the year, falling to an annualised rate of 0.9 per cent, the lowest rate since the second half of 2008, amid the global financial crisis. Both the ongoing global slowdown and local factors have weighed on Australia's growth. Domestically, the bad news has centred on an acceleration in house price losses, focused on Australia's two largest markets of Sydney and Melbourne. Other macroeconomic indicators paint a grim picture. Measured unemployment rate of 5.2% may seem low but under-employment (measured around 30%) is high. Real wage growth remains stagnant. Farm production is adversely affected by natural calamities (fire, drought and flood). Continued slowdown in household consumption growth and the retreat of dwelling investment are surely pointing towards an impending recession in Australia. Against this backdrop, suppose the Australian economy goes into a recession from the third quarter of 2019. Policy planners are devising policies to restore internal and external balance. Using the IS-LM-BP and also the ADAS-NX=0 frameworks, answer the following questions (with neat diagrams and explicit analyses).

a) Show the equilibrium level of interest rate and output of the Australian economy at the onset of the recession with the help of IS-LM-BP curves. Additionally, using the AD-AS-NX=0 diagram explain the prevailing price level and output

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