Question 1. Australia, like many other countries in the world, experienced a recession caused by the COVID-19 pandemic and subsequent lockdown even the Australian Government introduced several stimulus packages such as the JobSeeker and JobKeeper. During the same period, inflation was very low. The recession is over and the economy is now overheating as people are now spending more. Another important development in the last several months is the war in Ukraine. Recently, inflation has reached a historically high level. Using the theoretical models and empirical evidence presented in lectures, please answer the following questions (use appropriate diagrams, if necessary):

a) Do you think that the JobSeeker and JobKeeper programs were effective enough to stimulate consumption and aggregate output? Use the concept of multiplier for your answer. Time series data at quarterly frequency (from December 2013 to December 2021) for the share of (household) saving as a percentage of GDP is given in a spreadsheet in the same folder as this assessment (File Name: Household saving ratio). Using the data, plot the marginal propensity to consume (c) and the multiplier against time (two separate graphs). Does the information in the graphs support your answer?

b) Using the aggregate demand (AD) and short-run aggregate supply (SAS) framework, explain the recent high episode of inflation and higher output.

15 (8 + 7) Marks

RELEVANT DATA IS PROVIDED IN THE PICTURE.

B C D E F G H 1 Household saving ratio, seasonally adjusted Household saving ratio (%) 3 Dec-13 7.5 Mar-14 7.2 5 Jun-14 7.9 Sep-14 7.6 Dec-14 7.8 8 Mar-15 7.2 9 Jun-15 7.6 10 Sep-15 6.8 11 Dec-15 5.4 12 Mar-16 5.4 13 Jun-16 5.9 14 Sep-16 5.6 15 Dec-16 5.2 16 Mar-17 5.4 17 Jun-17 4.8 18 Sep-17 4.5 19 Dec-17 4.9 20 Mar-18 4.7 21 Jun-18 4.5 22 Sep-18 4.7 23 Dec-18 5.4 24 Mar-19 5.9 25 Jun-19 5.3 26 Sep-19 7.9 27 Dec-19 7.1 28 Mar-20 9.6 9 Jun-20 23.7 30 Sep-20 20.3 31 Dec-20 14.2 32 Mar-21 13.6 33 Jun-21 11.8 34 Sep-21 19.8 35 Dec-21 13.6 36 37 Source: Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product December 2021