Question 5

At the same time as the RBA is reducing interest rates, the Australian Government will be running a budget deficit in 2020. How will this affect aggregate demand? A diagram would assist your answer here and attract further marks. (3 Marks or 2 without a diagram)

How will the size of the marginal propensity to consume affect the size of the multiplier and how will this impact on this fiscal policy initiative? (3 Marks)

If consumers decide to increase their rate of savings due to increasing uncertainty about the future, explain how this will affect the fiscal policy initiative. (2 Marks)

Discuss whether this fiscal policy initiative aligns with the RBA's decision to reduce interest rates. (1.5 Marks or 2 Marks if crowding out is mentioned)