As the world learns to live with the novel coronavirus (COVID-19), policymakers need to understand the macroeconomic consequences of the covid-related restrictions. Australia adopted a zero-COVID strategy at the beginning of the pandemic. Such a strategy aims to effectively eliminate the virus from the population by quarantining the sick and locking down entire cities, states, or countries. Unavoidably, this policy shocked both production and consumption. In late 2021, the government ended its zero-COVID strategy. In 2022, the government lifted most of the covid restrictions such as ending lockdowns and no more quarantine or testing requirements for international arrivals.

a) Using the Aggregate Demand (AD) and Aggregate Supply (AS) model, explain the effects of lifting covid restrictions. Carefully draw the diagram to reflect the effects, making sure that you label your diagram clearly. 

b) Government used to support workers to isolate if they have tested positive for Covid-19. Discuss the potential effect on AD and AS of providing these individuals with a direct cash transfer and, using your diagram, depict the effect of this policy. 

c) As a result of the knock-on effects from the Covid and strong consumer demand, Australia is experiencing record-high inflation. The Reserve Bank of Australia responds to the high inflation rate by increasing the official interest rate. Sketch the AD and AS diagram to explain how this policy affects the economy. 

d) Discuss what would happen if, as part of the government’s recovery efforts, they invested heavily in pharmaceuticals’ R&D, resulting in the prompt availability of coronavirus vaccines. Using your diagram, show what the government hopes will be the effect of the availability of vaccines on the macroeconomy. 

e) End your discussion with an assessment of the macroeconomic implications of the emergence of new coronavirus variants if the country continues to follow a zero-COVID strategy.