Question

during COVID-19 crisis, did the Australian government embark on a expansionary or confectionary fiscal policy? in the time of uncertainty, if the government was to use the has policy, explain how this will help to restore the economy. alternatively, if the government was to use government expenditure, explain how this will help to restore the economy.

Answer 1

The Covid 19 Crisis has led to the development of an economic recession for most countries including Australia. As business establishments remain shut, and are told not to open unless the situation corrects itself, the aggregate demand for goods and services in the economy is falling rapidly.

As a result of this, the producers are making losses and have resorted to firing people and unemployment in the country over a period of time is rising.

To counter this recession cycle, the government of the day has resorted to reduce the tax rates for common citizens and is seen as an expansionary policy. During a recession cycle, the flow of money in the country remains low. Once, tax breaks are allowed, people begin to have extra additional money readily available with them which they can use to fund their demand. This push in the demand for goods and services causes the price to rise and the economy can return back to its normal position.

If, on the other hand, the government is to increase spending as a means to increase the flow of money in the economy, it does so by awarding tenders and other contracts to private players and developing the much needed infrastructure which can increase demand and investor confidence during the time period. The extra availability of funds, which the government spending does increases the aggregated demand further.

This can be explained with the help of the following diagram:-

We see here that, the optimum price which is Price 1 is achieved when the initial equilibrium shifts towards the left and the initial demand shifts to the increased demand as a result of government following expansionary policy. The Supply also increases.

It is important to know that the demand curve is downward sloping because people demand more with a decline in prices and the opposite is the case with supply wherein increased prices bring increased returns.

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