Section B. Short Written Answers. [34 marks]
[There are three (3) main questions to be answered using well-labelled, hand-drawn diagrams, with accuracy and sufficient explanations.]
Q1 – Modules L3 and L4. Aggregate Demand and Fiscal Policy in Recessionary Times
[Suggested word count for Q1: 400 to 500 words or less]
Australia has been in recession during the first half of 2020 as the pandemic led to a substantial reduction in production and household spending, according to this article: 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
In response, fiscal policy in Australia has played an important counter-cyclical role, as pointed out in these articles:
https://www.theguardian.com/australia-news/2020/jul/21/jobseeker-payment-economists-on-why-its-dangerous-to-cut-covid-19-welfare-subsidy
https://www.abc.net.au/news/2020-10-06/why-people-spend-save-stimulus-tax-cut-coronavirus-budget/12698520
A. Use the multiplier model to illustrate and explain in some detail how the aggregate demand function will shift due to the pandemic-led “household recession”.
[7 marks]
B. On the same diagram in Part A, illustrate and explain how fiscal stimulus measures are helping to mitigate the macroeconomic shock from the coronavirus.
[4 marks]
C. Elaborate on the different ways in which Australian households (more vs. less credit-constrained) have responded to the government stabilisation policies.
[6 marks]
Q2 – Modules L5 and L6. Unemployment the WS/PS model in a Post-COVID-19 world
[Suggested word count for Q2: 300 to 400 words or less]
Pandemic containment policies have cut global production which has led to rising unemployment in 2020. However, some predict that the coronavirus pandemic might stimulate innovation and help workers become more productive, e.g. see:
How Innovation Is Driving Productivity During And Beyond The COVID-19 Pandemic
Have we just stumbled on the biggest productivity increase of the century?
In this context, use the WS/PS model to illustrate and explain in some detail what happens to an economy’s equilibrium unemployment in a post-COVID-19 world.
[10 marks]
Q3 – Modules L7 and L8. Monetary Policy Response to the Recent Negative Shock
[Suggested word count for Q3: 300 to 400 words or less]
Central Banks around the world have responded to the pandemic by using expansionary monetary policy. They will probably need to aim for a higher level of inflation, as advanced capitalist economies attempt to recover from the negative shock, according to these articles:
https://www.abc.net.au/news/2020-08-28/us-central-bank-fed-landmark-policy-shift-on-inflation/12602362
https://theconversation.com/keating-is-right-the-reserve-bank-should-do-more-it-needs-to-aim-for-more-inflation-146393
How effective are reductions of nominal interest rates at stimulating domestic aggregate demand in a recession? In your answer, discuss the limitations of monetary policy and the problems of persistent low or negative inflation.
[7 marks]