Question

3. The recession has meant that the actual output of the Australian economy is below the potential output. The government has already introduced policy measures as you have identified above to boost aggregate demand (AD) and cover the output gap. However, from lecture 7 (Chapter 15) we can conclude that the road to economic recovery in Australia and mitigating the current output gap also requires policies to shift the short-run aggregate supply (SRAS) to the right. Discuss two of the distinct current measures to boost the short run aggregate supply (SRAS) in the Australian economy.

Answer 1

Introduction:-

The Covid 19 Pandemic has become a great economic problem for countries across the globe. This is because people are told to stay back at their houses and the government is trying to contain the virus as far as possible. The end result of this has been that producers on a daily basis are making significant losses wherein the amount of money which they are making has fallen sharply.

Producers depend on demand from consumers and at the same time are effected by costs which help them keep supplies as desirable by the market. The supply represents the quantity which producers in the market are ready to produce at given a certain price which they would be able to sell the products for.

Now, that we know that demand is low and producers are making significant losses, the following are two critical measures which have been taken by the Australian government to increase the supply and shift the supply curve to the right.

It is important to note, that Short Run here refers to the fact that some part of the cost always remains constant whereas others may be altered.

Case Details:-

1) Job Keeper Payments and Wage Subsidies:-

One of the common ways of increasing the short run aggregate cost is to lower down the cost of production for the suppliers in the market. As this happens he sees a reduction in costs and it allows them to produce at a higher quantity to get better profit margins.

The Australian government lowered down the cost of operations for firms in the short run which translated to higher income and wages for them. This was done by the help of the Job Keeper Payments and Wages subsidies.

The government granted payments upto 1500$ in wage subsidies which would be given to business owners who were unable to make payments towards salaries for workers and this would help them in increasing their production levels because the cost of operations would be lowered down significantly.

2) Cash Flow Boosts for Employers:-

Another critical method which through the help of which suppliers would be encouraged to increase their production is that of cash flow boosts which aims to provide upto 100,000 Australian Dollar worth of immediate cash flow for small and medium business owners who employee people.

This then adds up to the existing capital which companies have and would allow them to increase their production levels and helps them in the short term to keep productivity in tact.

Conclusion:-

In the short run prices of fixed assets for companies remain constant. What the government can do is that they can alter input prices or allow for additional capital for firms which would then allow them to grow. The meaning of a rightward movement of short run aggregate supply curve means that the production capacity has increased with fixed costs remaining as is.

The Australian government has taken significant steps some of which have been indicated in the sections above which will lead to reduced costs and increased production levels as producers see higher profit margins for themselves. For example, when cost of production is lower, it gives producers an added advantage to produce at a higher level. The addtional 1500$ support would help producers with just that same is the case with cash flow boosts from which raw materials can be sourced.

Please feel free to ask your doubts in the comments section.