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In the months prior to the GFC, Australia’s unemployment rate was 4% which was below the...

In the months prior to the GFC, Australia’s unemployment rate was 4% which was below the natural rate of unemployment which was estimated to be 5%. During the GFC, Australia experienced a fall in investor confidence and domestic consumption which lead to a fall in output.

  1. Use the multiplier model diagram to illustrate and explain the impact of the GFC on the Australian economy. .
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Ans. When there was a fall in investor confidence and domestic consumption, it lead to a decrease in aggregate expenditure shifting the aggregate expenditure down from AE to AE'. This mean that output was more than aggregate expenditure, so, producers found their inventories piling up, so, they cut the production decreasing the output level from Y to Y'.

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