Question

Question：Consider the following statement, “The Morrison government this week announced $3.8 billion of infrastructure projects would be pulled forward or given additional funding over the next four years.”

Show the effects of these changes using the aggregate expenditure (AE)model on real GDP in the short run. In your answer make sure to discuss the linkages in stimulating change and the equilibrating process of moving to a new macroeconomic equilibrium output.

（word limit: 300-400)

Thank you!

The related information:

The Australian economy is "weak",with households weighed down by slow wages growth and higher taxes,the OECD has declared in a report that backs lower interest rates,calls for more government spending and paves the way for unconventional monetary policies.

In its six-monthly review of the global economy,the Paris-based think tank has sharply downgraded its expectations for Australia while raising serious concerns about the level of debt being carried by households.

The Morrison government this week announced $3.8 billion of infrastructure projects would be pulled forward or given additional funding over the next four years. The decision followed calls from the Reserve Bank of Australia (RBA),which has sliced official interest rates to a record low 0.75 per cent,for a lift in public spending plus productivity-enhancing structural reforms.

But economists have warned the new spending will equate to less than 0.1 per cent of gross domestic product (GDP),arguing much more needs to be done to get the economy growing fast enough to bring down the national unemployment rate.

The Organisation for Economic Co-operation and Development (OECD),which noted the global economy was now growing at its slowest rate since the global financial crisis,said it expected Australian GDP to expand by 2.3 per cent this year and next,well short of the federal

government's forecast.

It also expects private consumption,which accounts for about 60 per cent of total economic activity,to barely grow faster than inflation over the next two years.

In March,the OECD was expecting unemployment to start edging down. It has now lifted its forecasts,tipping unemployment to average 5.3 per cent in 2020.

"Economic activity has been weak," the OECD said about Australia. "Private consumption spending has been sluggish,weighed down by slow wage growth and an increase in taxes paid by households."

While the government has argued its recent tax cuts will help households offset slow wages growth,the OECD and other organisations such as the RBA have noted overall tax levels are increasing as the budget returns to surplus.

Research this week from National Australia Bank found Australian household debt was now at a record high of 202 per cent of annual income.

The OECD said high household indebtedness could "exacerbate" any economic shock that hit Australia.

It said with the RBA likely to cut interest rates further,which in turn could feed into a lift in house prices,lending standards might have to be tightened to protect households.

"High household indebtedness means that the authorities should stand ready to tighten macro- prudential policy settings if lower interest rates fuel house price inflation through a sharp pick- up in credit," the OECD found.

While expecting further rate cuts,the organisation said the Morrison government should "loosen fiscal policy" to help get the economy growing faster.

"Fiscal policy is expected to provide little support to economic growth,in accordance with the federal government's commitment to future budget surpluses," it said. "A more expansionary fiscal stance may be warranted given that the economy is growing well below its potential and the relatively low public debt burden.

"At the same time,growth-enhancing tax reforms should be prioritised. These include shifting the tax mix away from direct taxes and inefficient taxes like real estate stamp duty to the GST and land taxation."

Treasurer Josh Frydenberg said the nation's economic fundamentals remained sound,with the country now in its 29th consecutive year of growth.

He said there were "headwinds",particularly due to trade policy tensions that have hit confidence and business investment globally since May,but "the government's focus on productivity-enhancing reform will ensure our economy remains resilient".

"The international challenges are a stark reminder of why we must stick to our economic plan which has delivered lower taxes so you can keep more of what you earn,more infrastructure to boost productivity and which will return the budget back to surplus so we can meet the challenges that lie ahead," he said.

Answer 1

ANS

Since the Morrison government has claimed that ,$3.8 billion of infrastructure projects would be pulled forward or given additional funding over the next four years this directly means that there is the increase in induced investment .This type of investment is done to bring the economy back in equilibrium.

Aggregate expenditure or AE consits of four components

AE = C +G + XM+I

Where

Consumption (C): The household consumption over a period of time.

Investment (I): The amount of expenditure towards the capital goods.

Government expenditure (G): Government Investment

XM: Net imports

But when the government induces new investment the aggregate expendeture function upgrades to

AE= C+I+G+XM+I'

Where I'= new induced investment added by the government

It increases the total aggregate expenditure because of addition of new element that is induced investment which gives a upward shift to the AE curve and due to which the new potential GDP increases.