Question

Australia’s stimulus package to cushion the economic impact of COVID-19 pandemic is nearly 15% of 2019 GDP. Notable initiatives include: JobKeeper Payment ($1,500/fortnight), JobSeeker Payment ($550/fortnight), and Coronavirus Supplement ($550/fortnight). Using the AD-AS framework, explain how these initiatives will help the economy deal with the economic fallout from COVID-19?

Answer 1

The payments given out will increase disposable income of the people and will allow them to increase consumption which had decreased due to the pandemic. Hence the fiscal stimulus has increased aggregate spending which had decreased due to the pandemic. Thus there will be a right shift in the AD curve. AS curve is unaffected. The shift in AD causes real GDP to rise up and helps expanding the economy at a time when the economy had collapsed. Another impact of the fiscal policy is an increase in the price level.