To tackle high inflation in Australia, the RBA increased the official cash rate 11 times since
May 2022. The RBA governor in his speech on May 03, 2022, stated:
"The main driver of the higher inflation has been global developments, with a series of major
global supply shocks pushing prices up. Over the past two years, COVID-19 has interrupted
supply chains and continues to do so, with the recent lockdowns in some Chinese cities again
disrupting production and transport. On top of this, Russia's invasion of Ukraine has resulted
in sharp increases in the prices of oil and gas, base metals and many agricultural commodities.
These shocks to global prices inevitably flow through to higher inflation in Australia.
But the higher inflation outcomes have a domestic component as well. There are a number of
areas where strong demand is putting pressure on available capacity. ..."1
A) Using a static AD-AS model and associated diagram, show and explain how the
situation described by the RBA Governor led to high inflation in Australia.
B) Using the static AD-AS model discussed in the unit, show and explain how the decision
to increase the interest rates would have achieved the goal of controlling inflation for
the RBA.
