: Fiscal Policy

This Discussion Question considers the Australian Federal Budget 2020 in an AD-AS framework, in light of the COVID shock of 2020.

a) Draw a diagram indicating the primary shift(s) you would expect in AD-AS as a result of COVID19 affecting Australia (from March 2020 onwards). Please do not illustrate Fiscal responses yet; these will be the subject of questions below. Explain the AD/AS shift(s), and the effects on major macroeconomic variables. To simplify, you can draw your diagram as if the Australian economy were at potential GDP before the shock.

b) The following excerpts are from The Guardian, 6 Oct 2020:

I. "More than 11 million Australians will receive tax cuts with a permanent cut of $47 a week for high-income earners."

II. "$14 billion in new and accelerated infrastructure projects over the next four years in every state and territory, including Melbourne to Brisbane inland rail and Western Sydney international airport."

III. "The government has announced two additional economic support payments of $250 to pensioners and other eligible recipients, worth $2.6bn."

For each excerpt I-III above, explain the mechanisms by which the relevant policy is intended to pass through to the economy

c) Illustrate the likely effects of I-III above in by drawing appropriate shift(s) in AD-AS. Comment on the likely effects to: GDP, unemployment, inflation.

d) The size of the above macroeconomic effects will depend on a number of factors, both economic and non-economic. Briefly explain TWO of the key economic factors. Please focus on economic factors, as opposed to issues related to COVID transmission, vaccine, etc.