Economic conditions in Australia were generally quite subdued in the second half of 2008 and the first part of 2009. Output was sluggish, hours worked in the economy declined, unemployment rose and inflation started to abate.
By the standards of past recessions, however, this was a mild downturn. [....] Why was that so? [....]
First, our financial system was in better shape to begin with, being relatively free of the serious problems the Americans, British and Europeans have encountered.
Second, some key trading partners for Australia have proven to be relatively resilient through this episode. [....] Ongoing strength in demand for resources has kept Australian exports expanding. Australia’s terms of trade, even though well off their peak, remain high by historical standards. Confidence about the future for the resources sector is building quite strongly.
Finally, Australia had ample scope for macroeconomic policy action to support demand as global economic conditions rapidly deteriorated, and that scope was used. The Commonwealth budget was in surplus and there was no debt, which meant expansionary fiscal policy measures could be afforded. In addition, monetary policy could be eased significantly, without taking interest rates to zero or engaging in the highly unconventional policies that have been necessary in some other countries.
Q1. Use an aggregate demand – aggregate supply (AD-AS) model to explain the range of the aggregate supply curve covered by Governor Stevens’ remarks.
Q2. Use an aggregate expenditure model to explain the multiplier effects you would expect from the ‘ongoing strength in demand for resources’.
Q3. Explain the discretionary and non-discretionary reasons why government budgets may go into deficit or surplus.
Q4. Use an AD-AS model to explain the impact of ‘expansionary fiscal policy’.