Question

An assessment of the economic impact of COVID 19 on the Australian economy – an International Macroeconomic perspective.

The RER and internal and external balance- automatic mechanisms of adjustment- Where is Australian currently on the SWAN diagram - possible policy interventions? (noting you can make assumptions about relative elasticities of the IB / EB schedules)

Answer 1

Australia is right now heading towards "Inflation Deficit " quadrant of SWAN diagram in which 4 quadrants are present namely :

• Unemployment surplus
• Unemployment deficit
• Inflation surplus
• Inflation deficit

Coronavirus has had huge impact on economic growth due to lockdown and shutdowns and social welfare losses.

The economic growth remains subdued as Aggregate demand and consumption both fall simultaneously also leading to fall in prices and inflation.

Investment is pumped out due to falling interest rate regime and lower economic outlook of companies.

Government spending is ramped up due to an expansionary fiscal policy by reducing taxes and spending. Also net exports go negative as imports surge due to supply shocks.

Negative growth in GDP causes high unemployment and lower inflation based on Philips curve movement.

Thus in short run, aggregate supply is high but aggregate demand is low and real GDP falls. However in long run the economy stabilises.

The RBA and Government has been great in fiscal stimulus and unlimited bonds buying programmes with rate cuts, CRR and SLR and liquidity coverage ratio cuts. Triggering automotic stabilizers and combined above policy will help alleviates financial distress and grow economic growth throufh higher consumption and disposable incomes.

The supply of credit availability rises causing its demand to go down considerably.

Since the interest rates are cut, the banks shall transmit easier loans availability at lower rates and thus loan markets will grow enormously.

However the cases has risen to 6000+ approximately and states have been relaxed and thus caused havoc.

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