Question

1. Covid-19 has slowed down the global economy. In a situation like this, as an advisor to the treasurer of federal government of Australia, advise the treasurer on what type of fiscal policy should be enacted? How would this be enacted via taxes? Through government spending What is the intended effect of this policy on aggregate demand? Diagram
2. What effect does rising business optimism and confidence have on the aggregate demand curve? Give examples.
3. Suppose a summer of perfect weather leads to record harvests of wheat.
a. What happens to price levels and output in Australia in the short run?
b. Suppose the government takes on action to help the economy. Show what happens to price levels and output in the long run.
c. Suppose, instead, the government decides to take action to help the economy. What actions would you recommend? Why?
d. If the Australia government makes the appropriate policy response, what happens to price levels and output in the long run?
N.B. Use diagram to explain your ansert.

Answer 1

1. Covid - 19 had slowed down the global economy. In a situation like this, government should use expansionary fiscal policy to increase real output of the economy. This expansionary fiscal policy can be enacted either by cutting taxes (tax cut increases personal disposable income. This will increase consumption and investment spending. Therefore Aggregate demand will increase), or by increasing government spending. Government can also use both policies (cutting taxes and increase government spending) at the same time to boost aggregate demand.

This expansionary fiscal policy will shift the aggregate demand curve rightward. As a result, both equilibrium price level and real GDP goes up.