Consider the current economic conditions in Australia, where (even though official data is not yet in)...

Consider the current economic conditions in Australia, where (even though official data is not yet in) current output (real GDP) is currently below potential GDP.

(i) What type of fiscal policy has the government USED to try and get Australia to potential GDP? (this means which fiscal policy the Government has USED, that makes real GDP below potential GDP). Draw an AD-AS diagram to illustrate this situation (what makes Real GDP below potential GDP such as expansionary or contractionary). Explain the figure in some detail. By this, we mean do not just explain the changes in the diagram, but also state what components of the AD and AS curves are changing (if any), and in which direction.

ii. Can the existence of a fiscal multiplier help the government in terms of its commitments to reach potential GDP level of output? Provide a brief example.

Expert Solution

note - I have mentioned how ad curve shifts due to the shift in IS CURVE . If the effect if of IS curve is not needed, you can refer only the below part of the diagram.

Rahul Sunny answered 2 years ago

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