Q1 - Modules L3 and L4.Aggregate Demand and Fiscal Policy in Recessionary Times

Australia has been in recession during the first half of 2020 as the pandemic led to a substantial reduction in production and household spending, according to this article:https://www.theguardian.com/business/grogonomics/2020/sep/02/australians-needs-government-support-to-get-out-of-this-recession-winding-it-back-is-not-an-option

In response, fiscal policy in Australia has played an important counter-cyclical role, as pointed out in these articles:

https://www.theguardian.com/australia-news/2020/jul/21/jobseeker-payment-economists-on-why-its-dangerous-to-cut-covid-19-welfare-subsidy

https://www.abc.net.au/news/2020-10-06/why-people-spend-save-stimulus-tax-cut-coronavirus-budget/12698520

A.Use the multiplier model to illustrate and explain in some detail how the aggregate demand function will shift due to the pandemic-led "household recession".

[7 marks]

B.On the same diagram in Part A, illustrate and explain how fiscal stimulus measures are helping to mitigate the macroeconomic shock from the coronavirus.

[4 marks]

C.Elaborate on the different ways in which Australian households (more vs. less credit-constrained) have responded to the government stabilisation policies.