DQ2: Monetary Policy

This Discussion Question also considers the effects of COVID-19 on the Australian economy. Using an AD-AS framework:

a) Would you expect the RBA to implement expansionary or contractionary monetary policy in response to COVID-19? Explain why. Illustrate the expected effects of this response by drawing appropriate shift(s) in AD-AS.

b) How has such a monetary policy response, as you have identified in part a), typically been implemented in Australia with conventional monetary policy? How has it been implemented in 2020?

c) Explain the transmission mechanisms of such a monetary response and comment on the likely effects on: GDP, unemployment, inflation.

d) Comment on some of the key economic factors that will determine how successful the monetary policy response will be. Please focus on economic factors, as opposed to issues related to transmission, vaccine, etc.

e) Does the observed data confirm your analysis? Briefly cite some available data. Due to time constraints and data availability, you may not be able to find data on all macroeconomic variables of interest. In these cases, you can simply indicate that up-to-date data is not yet available.