Question

2. 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

SOLUTION:-

Current measures to boost the short run aggregate supply:

- Higher labor productivity: If labor productivity can be increased through higher education and improving the skills of the existing workers, then output will rise manifold. This reduces the cost of production of the firm and boost the SRAS.

- Lower taxes and higher government spending: The Australian government should adopt expansionary fiscal policy wherein either taxes are lowered or government spending is increased. This will open up new spending and investing opportunities in all sectors and help in boosting the economy through shifiting the SRAS curve to right.

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