Question

<Why Australia's government debts and budget deficits are here to stay>

a) Using the AD-AS framework discussed in class, demonstrate the impacts of

spending on infrastructure and a tax cut on output and inflation in the short

run.

b) Also explain the likely impact of spending on infrastructure on output in the

long-run and show this on your AS-AD diagram.

c) Explain (using your own words) what would happen to unemployment and

output in the short run if job support payments (both Jobseeker and

Jobkeeper) were switched off.

Answer 1

a) It is expected that the economy is intially at full employment level. Increase in the level of government spending on infrastructure and tax cut in the economy will increase the level of government expenditure and furthermore increase consumption expenditure in the economy. As the level of consumption and government expenditure increases, the level of aggregate interest in the economy will increase. In the diagram below, the equilibrium shifts from e1 to E2 where both output and expansion increases in the short run. The effect is depicted in the diagram below: