Question 2

"The "Great Lockdown" to fight COVID-19 will cost the world economy $US9 trillion and trigger a decline in global output 30 times greater than during the global financial crisis, according to International Monetary Fund predictions for the worst year since the Great Depression.

The fund's World Economic Outlook forecasts global GDP dropping 3 per cent this year eclipsing the 0.1 per cent reduction in annual output as a result of the GFC with Australia's economy contracting by a hefty 6.7 per cent in 2020 before heading into recovery."

(a)Using the AD-AS model, examine the macroeconomic effects of an expected recession on Australia as predicted by the International Monetary Fund and the Australian Government.

"Budget Bailout - $105BN Rescue Plan - Rates cut to New Low - Dollar Falls to 2002 Level"

EXTRAORDINARY TIMES

"After the RBA slashed interest rates to a record low 0.25 per cent on Thursday, the first out-of-cycle cut since 1997, Josh Frydenberg said:"Extra ordinary times call for extraordinary measures"

The Australian, page 1, 20 March 2020.

Australian economic stimulus package: how much governments have committed to coronavirus crisis

"Measures total $213.6bn from the commonwealth, $11.8bn from the states and $105bn in RBA-government lending"

"The $130bn support package announced by the Morrison government on Monday is the largest plank in a raft of measures to keep Australians in jobs and support those out of work, unprecedented in its scale.

Every state and territory has announced stimulus packages that, along with the impact of Covid-19-related closures on their revenue, are expected to put them all in deficit.

By the end of March, the measures announced totalled$213.6bnin direct, on-budget spending from the federal government,$12.8bnfrom the states and$105bnin lending from the Reserve Bank and the federal government"

The Guardian, 31 March 2020

(b)Using the AD-AS model, explain how the abovementioned massive fiscal policy package can stimulate the economy. How effective will this historically massive stimulus package be in terms of rescuing the economy from the expected recession?