Section 1: COVID-19 Impact

Using the(1)Aggregate Demand-Aggregate Supply Model with the Labour Market Model and the(2)Aggregate Expenditure (AE) Model with the Labour Market Model and assuming the Australian economy was at the natural rate of output at the onset of the crisis:

• Illustrate the impact of the crisis on the domestic economy using both the(1)AD-AS model and its associated labour market model and the(2)AE model and its associated labour market model. Ensure you clearly label all parts of the diagram, clearly demonstrating the original equilibriums and the COVID-19 outcomes.
• Discuss your rationale for the outcome you have demonstrated in your diagrams, ie discuss which components of AD/AS/AE have been affected and why - the basis of the shifts you demonstrated in the diagrams. Explain what has occurred in your labour market models and why.

Section 2: Model Assumptions and Resultant Outcomes

The 2 models you have used have different underlying assumptions.

• Outline the major underlying difference(s) between the two models.
• Briefly discuss and illustrate how thedifference(s) in the model assumptions impact the degreeof the potential impact on the economy. Use the AD-AS Model and provideONEdiagram to illustrate the potential difference in outcomes depending on the assumptions made. (Hint - consider the assumptions underlying the AE model - what SRAS curve reflects this?)

Section 3: Policy Recommendations

Based on the differences of the model:

• Provide alternate policy recommendations for each model, the justification for the policy recommendations and any costs/benefits you perceive of these actions. Discuss whether self-correction is possible for either model - if so, what is the process. Discuss the costs and benefits of self-correction in this case relative to government intervention.