Question background: Australia is a large open economy with high capital mobility. In 2020, COVID-19 brought a sudden shock to the globe, causing Australia to close its boarder as many countries did. Many factors, such as local restrictions and the loss of international labour and tourists, further make it difficult for businesses in Australia to survive. The mainstream Australian export is iron ore. However, some mineral companies complained that it was much harder to sell products overseas, and they had no choice but to cut even more labor to save costs. Domestic consumption also dropped dramatically.

Questions

1. Based on the question background, how does COVID-19 affect Australias current account (CA)? Answer: (Hint: please enter word increase or decrease in the blank) (1 mark)

To rescue the economy, Australia could implement the following two options: expansionary fiscal policy and expansionary monetary policy.

Assuming the Australian central government decided to adopt expansionary monetary policy (i.e., reducing interest rate) ONLY, how would this action affect Australian capital account (KA)? Answer: (Hint: Please enter word increase or decrease in the blank) (1 mark)

c. (continuing from previous question)

In reality, the Australian government adopted both expansionary fiscal and expansionary monetary policies. Interestingly, the expansionary fiscal policy had a greater impact on simulating the Australian economy and eventually caused AUD appreciation during the contractionary period. How would the outcomes of Australian expansionary policies (i.e., the appreciation of AUD) affect the trade account in Australia? (Hint: Discuss from the economic theories you learnt in the Balance of payments, and you can safely ignore any other peripheral factors, i.e., political/trade friction, price volatility, or war events.) (3 marks)