This question is on economic recession and the effectiveness of fiscal stimulus

In 2020, Australia suffers its first recession in 29 years due to COVID-19. GDP figures from the Bureau of Statistics show two consecutive quarters with negative growth rate (-0.3% for the March quarter and -7% for the June quarter). The Department of Treasury responded by preparing a Budget Paper in October with 213.65 billion dollars of deficits to reduce personal income tax burden and support business investment, through the temporary full expensing and loss carry-back measures. In addition, the Government will invest 7.5 billion dollars for transport infrastructure and 1.3 billion dollars for large manufacturing projects.

A.Using the Aggregate Demand, Long-run Aggregate Supply, and Short-run Aggregate Supply diagrams, illustrate and explain what the purpose of this budget package is. [5 marks]

NOTE: Your written response can be entered in the text box below. Your supporting diagrams can be drawn on your blank sheet of paper and uploaded in the placeholder hybrid question at the end of Part 4. You will have time at the end of your exam to upload a photograph of your hand-drawn response.

B.With the support of a diagram, define the "Crowding Out Effect" and discuss its implications on business investment in the current context. [2.5 marks]

NOTE: Your written response can be entered in the text box below. Your supporting diagrams can be drawn on your blank sheet of paper and uploaded in the placeholder hybrid question at the end of Part 4. You will have time at the end of your exam to upload a photograph of your hand-drawn response.

C.Define the "Ricardian Equivalence Theorem" and discuss its implications on household consumption.