Q1 - Modules L3 and L4. Aggregate Demand and Fiscal Policy in Recessionary Times

2020 was a difficult year for Australia and the economy was technically in a recession as demonstrated in the following articles:

https://www.abc.net.au/news/2020-09-03/coronavirus-recession-in-australia-six-graphs-explain/12624250

https://www.theguardian.com/business/grogonomics/2020/sep/02/australians-needs-government-support-to-get-out-of-this-recession-winding-it-back-is-not-an-option

However, the economy has been recovering well from this recession due to the timely and effective fiscal stimulusmeasures adopted by Australian government, as pointed out in the 2022 budget document, latest macroeconomic indicators (GDP, unemployment and inflation) and other articles given below.

https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-1.pdf

https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release

https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release

https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release

https://www.theguardian.com/australia-news/2020/jul/21/jobseeker-payment-economists-on-why-its-dangerous-to-cut-covid-19-welfare-subsidy

A. Use the AD (Aggregate Demand) model to show the impact of the decline in consumption and investment on the Australian economy in 2020. Show how the fiscal stimulus measures that the Australian government adopted, helped the economy to stabilise in 2021 and 2022. On the same diagram, illustrate and explain the process of the multiplier.

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B. Now assume hypothetically, if the Australian government would have cut the government spending to reduce the levels of debt and to improve their budget balance in 2021. Comment on what would be the possible implications of such an early withdrawal of support in the economy. (No diagram required for this question).