DQ3: Macroeconomics [15 marks]

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

"... the coronacession^* has pushed the official interest rate almost to zero, while 'quantitative easing' only seems to push up the prices of houses and other assets.

"With monetary policy having lost its potency, fiscal policy becomes the only game in town. The only policy instrument capable of being used to stimulate growth and keep our economy and everyone else's recovering and unemployment falling".

[^*Note: the term "coronacession" is a recently coined word; it means "corona recession"that is, the recession caused by the effects of the coronavirus pandemic].

a)In earlier times, when monetary policy had NOT yet "lost its potency", what monetary policy action would be conducted "to stimulate growth and keep our economy recovering"? [2 marks]

b)Illustrate your answer above to part (a) in an AD-AS framework. [3 marks]

c)Explain how your answers to (a) and (b) above would transmit through the economy, and the main macroeconomic effects that could be expected. [4 marks]

d)Explain succinctly how monetary policy has "lost its potency". [3 marks]

e)Now that "the coronacession has pushed the official interest rate almost to zero", explain what alternative actions the Reserve Bank of Australia has attempted to use "stimulate growth and keep our economy and everyone else's recovering and unemployment falling". [3 marks].