(i) The COVID-19 recession in Australia and the U.S. was due to both supply and demand factors....
Question:
(i) The COVID-19 recession in Australia and the U.S. was due to both supply and demand factors. Explain these two factors clearly in your Introduction. (ii) The VoxEU discussion suggests that "the Biden plan could amount to three to five times the remaining (negative) output gap in the US". What will be the impact of this fiscal stimulus on the U.S. economy, assuming that the economy is in a recession? Explain in words and show with the help of a graph, holding prices fixed in this analysis. Carefully explain the transmission channels and the role of the multiplier. (iii) If prices change, why could the Biden plan lead to inflation in the short-run? Explain in words and with the help of a diagram. (iv) Explain in words, under what conditions, will the fiscal stimulus as per the Biden plan not lead to inflation in the medium term? (v) Like the U.S., Australia has also taken fiscal measures targeted at impacted households and firms. Briefly explain why you think it will lead (or not lead) to inflation in Australia.