Question

The recession has meant that the actual output of the Australian economy is below the potential output. The government has already introduced policy measures as you have identified above to boost aggregate demand (AD) and cover the output gap. However, from lecture 7 (Chapter 15) we can conclude that the road to economic recovery in Australia and mitigating the current output gap also requires policies to shift the short-run aggregate supply (SRAS) to the right. Discuss two of the distinct current measures to boost the short run aggregate supply (SRAS) in the Australian economy. (300 words)

Answer 1

The pandemic has caused both supply side as well as demand side shocks in the economy. The demand side shocks of the pendemic has been covered by expansionnary monetary and fiscal policy of the government. Following are the two measures taken by the Australian economy to boost aggregate supply in the short run:

1. Provision of subsidies to firms to increase their production levels: It has been observed that firms are provided with various types of production subsidies which helps in reduction of the cost of production of the firms because some part of the cost is borne by the government. As cost of production in the economy decreases, the quantity supplied at each price level will increase and this will shift the aggregate supply curve of the economy rightwards and help in reduction of supply side frictions.

2. Reduction in taxes and moratorium on instalments from borrowers: Government is also taking measures to reduce taxes on various production units at the time of pandemic. The government has also advised commercial banks to provide moratorium to borrowers on their instalments during the time of pandemic when sale was not occurring in the economy. This also helps in reduction of cost of the firms and increase aggregate supply at each unit of prices.

The above measures can help in the reduction of supply side frictions in the economy witnessed during the time of pandemic.