The impact of Covid-19 on the economy is estimated to be very large. To combat the negative
Question:
The impact of Covid-19 on the economy is estimated to be very large. To combat the negative impact
on the economy, the Australian government implemented a fiscal stimulus package worth more than
10 percent of GDP, while the RBA reduced the cash rate to 0.1 per cent and implemented a series of
unconventional monetary policies including:
-Forward guidance: the interest rate to remain at this level for 3 years
-Quantitative Easing: a target for the yield on 3-year Australian government bonds of around 0.25%
-A three-year funding facility: $90bn to be lent to banks at an interest rate of 0.25% to allow banks to
increase lending to small-medium enterprises
.
a)
How do these unconventional monetary policies affect expectations, and how will consumption
and investment respond to those changed expectations?
(3 points)
b)
Explain why the IS curve becomes steeper once we account for expectations in the model.
c)
Use the expectations-augmented IS-LM model to analyse the impact of these unconventional
monetary policies on the economy.
d)
The Australian government also established large transfer programs including Job Keeper and Job
Seeker. Building on your analysis in Part c), show how these policies impact the economy.
(3
e)
In your opinion, are there any limitations to the effectiveness of fiscal policy? Explain your answer.
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr