Question

Australia Economy has been hit by COVID19 pandemic shock. Use an AD-AS framework to graphically illustrate the impact of the pandemic on the economy. Be sure to label: the axes, the curve, the initial equilibrium levels, the direction curve shift and the equilibriums.

Write down the predicted impact on components of GDP ( i.e. Y, P, r, I, and U). And write down Three policies that have been implemented by the government or RBA to deal with the impact of COVID 19 on the economy. Explain briefly what goal each policy is intended to achieve in terms of impact on AD, AS or unemployment?

Answer 1

The global economy in the 21st Century is experiencing a recession like none which has happened before. The core reason for this is that it is not cyclical in nature, and its effects at present are not known, the world economy is going through an extremely tough situation as establishments remain shut and people have been told to stay at home.

The Aggregate Effect of this is that the total demand of Australia and most other economies has gone down drastically. Australia has industries such as Tourism, Education and Financial services on top of the list in its development. All of these have been seriously shut and would continue to remain the same in the months to come.

As a result of the decline in Aggregate Demand for goods and services, the production levels also go down drastically, the net result of which is that producers reduce their production levels and unemployment may increase as they try and fire people to control their cost of operations.

The same can be explained with the help of an Aggregate Demand and Supply Curve shift which is as follows: -

In the above graph, we see that the Initial Prices are lowered and the country consumes in lower quantity than it earlier used to. The net outcome of which is that the Aggregate Demand begins to fall rapidly and shifts to the left as indicated. The Aggregate supply also falls and is indicated as the slope between Initial Equilibrium and Reduced Equilibrium respectively.

Now when we come to the components of GDP which is the total production of goods and services in the economy, the components of the same and their net effects due to the corona virus pandemic are as follows: -

1) Private Consumption: -

As a result of the pandemic, the economy remains shut and people find it increasingly difficult to be able to consume goods and services with the same level which they used to earlier. Establishments have been closed and that would remain the case for a long time now. The end result of this is that private consumption, except for essential items has gone down drastically.

2) Investment Expenditure: -

Investment expenditure has also decreased as the Aggregate Demand for goods and services declines. The incentive of business owners to increase their expenditure and increase spending and seek expansion is extremely low.

3) Government Expenditure: -

During any recession, even though the government earns lesser revenue through taxation, its primary aim is to increase the level of expenditure, so as to ensure that the economy can come back to its normal state. The government of Australia has been increasing its expenditure on Healthcare facilities for an example, to bring back the economy on track.

4) Change in Inventory: -

With establishments remaining shut, the Change in Inventory would most likely remain negligible. This is because, production is running at its minimum level due to the lack of demand and supply.

5) Net Value of Exports and Imports: -

With the entire globe suffering extremely due to the pandemic situation, it is correctly estimated, that both the exports as well as the imports would go down drastically.

Thus, we can conclude, that barring government investment all other components would see a major decrease and the overall GDP of the Australian economy could fall drastically.

Steps Taken to Control the effects: -

The government of Australia has taken significant steps to control the economic impacts of the Corona Virus Pandemic three of which are illustrated and their effects have been explained as follows: -

1) Job Keeper Program: -

With a view to ensure that unemployment in the country does not go unchecked and workers are paid adequate salaries, the government of Australia has introduced the Job Keeper Program whereby, it would be granting a support of up to 1500 Australian Dollars directly to business owners every fortnight for them to be able to retain workers.

This would help in ensuring, that during this crisis the unemployment rates do not go up any further.

2) Loan Support for Small Business Owners: -

Small Business owners contribute significantly towards the overall supply and their demand is also significant when clubbed together. Thus, with a view to keeping demand and supply in check, the government has started to offer over 50% loan as guaranteed to be paid by the government in case of a default by small business owners.

This is done with a view to increase investments in the country and bring it back to normal levels.

3) Bank Loan Deferral: -

In addition to maintaining demand in the economy, bank loan deferrals have been provided for up to 6 months to most categories of loan takers which provides them with an additional flow of income and prevents any delay. This is largely seen as a great initiative to be able to deal with the current crisis situation and keep demand in check.

Please feel free to ask your doubts in the comments section.