DQ1: Macroeconomics [10 marks]

This Discussion Question considers an excerpt from The Sydney Morning Herald, 30 April 2021, regarding the Australian economy in 2021:

"When the problem is the private sector's reluctant to expand, and the wages households use to increase their consumer spending have stopped rising, the only way to keep the economy moving until the private sector revives is spending by the public sector [i.e. the government]."

a)In an AD-AS framework, assuming for simplicity that the economy began at potential, illustrate the effects of: "the problem is the private sector's reluctant to expand, and the wages households use to increase their consumer spending have stopped rising". What are the main macroeconomic effects of this and COVID19? Draw a diagram indicating the primary shift(s) you would expect in AD-AS. Please do not illustrate policy responses yet; these will be the subject of questions below. [2 marks]

b)In such a situation, the excerpt goes on to say that "the only way to keep the economy moving until the private sector revives is spending by the public sector [i.e. the government]." Explain three ways this could be implemented. Give an example for each. [3 marks]

c)What economic major factors will affect the effectiveness of the three examples you give above? Please focus on economic factors, as opposed to issues related to COVID transmission, vaccine, etc. [3 marks]

d)Choose one example for stimulating the economy that you have given, and illustrate the effects in AD-AS. [2 marks]