Macroeconomics

ECON1042 – Student Name – Student ID

Table of Contents
Section 1 2
AD-AS Model 2
AE Model 2
Section 2 2
Model Comparison 2
Model Assumption 2
Section 3 2
Policy Recommendation – AD-AS Model 2
Policy Recommendation – AE Model 2

Section 1 – COVID-19 Impact
COVID-19 Impact
Duration COVID-19 (use reference), Private Consumption decline，business revenue decline，The decrease of employment opportunities, the increase of unemployment rate, the decline of consumer confidence and business confidence have led to the decrease of investment, eventually ,In terms of macroeconomic indicators GDP growth, unemployment rate, inflation rate It changes in June（You can choose another time, but June is the time when the Australian economy is most affected）{ The topic does not mention the analysis of Australia’s economy, But you can say take Australia as a typical example}

https://www.abs.gov.au/articles/one-year-covid-19-aussie-jobs-business-and-economy

https://www.abs.gov.au/articles/measuring-impacts-covid-19-mar-may-2020

https://www.abc.net.au/news/2020-09-02/australian-recession-confirmed-as-economy-shrinks-in-june-qtr/12619950

https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2020

https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/jun-2020

https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/jun-2020

AD-AS Model
AD curve: Significant. consumption decrease, investment decrease, due to
SAS curve: Medium lockdown policy, non-essential service industry shut down,
No influence on LAS curve due to 4 resources of long-term productivity level uninfluenced, Labour, Land, Capital, Technology.

Describe the change process，Y, Price Level – inflation, Unemployment rate level

(Mark as – real wage level)
Due to lockdown, and most businesses affected by COVID-19, labour demand significantly decrease, employment level decrease, unemployment rate increase.

AE Model

Ep = Ap + Y(c-ct-nx)
Aggregate expenditure = Autonomous Spending + Induced Consumption – Induced Import
Ca (autonomous consumption) decrease, wealth decrease,
Ip decrease, business confidence decreases, revenue decrease
Ap decrease, AE curve shift down
Consumption confidence decrease also decrease marginal propensity to consume c
AE rotate down, slope decrease
Results: equilibrium Ye decrease. Price level decrease, inflation decrease

(标成 – real wage level)

Section 2

Model Comparison
AD-AS model price level and real GDP, Total demand for，Short term aggregate supply, The relationship among three curves of long term aggregate supply，The higher the total demand price is，The less demand，main cause （hypothesis：wealth effect, interest-rate effect, foreign purchase effect）, Short term supply, the higher the price, the more supply, price and wage hysteresis theory .Nominal Wages Rigidities Sticky Prices Misperceptions， Long term supply determines potential real GDP，It is determined by the four elements of national productivity，land labour capital technology. When equilibrium, AD, SRAS & LRAS intersect at one point.

AE model : The analysis is that aggregate expenditure represents the total demand，Real GDP represents total supply，The demand is divided into two parts，Autonomy expenditure is not affected by income，As well as the revenue affected part of induced expenditure, the line of 45 in the period represents the equilibrium curve when total production (total supply) = total demand，That is to say, it reflects the SRAS curve， aggregate expenditure curve Ep = Ap + Y(c-ct-nx) represent the total consumption (demand). I think that the economy will be at the intersection of two curves, which represents the equilibrium state of total production equal to total consumption

Model Assumption
Classical Theory – Prices and wages are completely flexible ensuring a return to full-employment equilibrium
If according to classical assumption，COVID-19 impact — AD decrease, only decrease price level, have no impact on Real GDP, Real GDP is only influenced by AS decrease.

Keynesian Theory – Prices and wages are rigid and the economy will not automatically return to full-employment equilibrium

If we use the Keynesian hypothesis, the command of cowid-19 ad decrease will affect the decrease of real GDP, not the price level, which will only be affected by SRAS curve
Section 3

Policy Recommendation – AD-AS Model
First, analyze self correction

In the analysis of different policy recommendations

Finally, the cost benefit of each method is analyzed

Price level decrease, actual GDP level less than nature real GDP level, when the supply side and the demand side think that the price change is a permanent change, which is permanent changes, the supply side will lower the nominal wage level to cope with the current situation of high unemployment rate and surplus labor supply because of falling prices and high real wage level, SRAS curve shift to right and back to long run equilibrium level

Policy recommendation: expansionary scale or monetary policy, which aims to increase ad, ad shift to right and return to long-term equilibrium

Cost benefit analysis: if the government implements an expansionary policy, the price level will rise further. If it is a fiscal policy, there will be a higher financial burden. If it is a monetary policy, there will be more money supply. But the advantage is that it will be more efficient and boost the economy in the short term

If it is self correction, the price level will not rise further, but will decrease. However, companies need to reach the balance of labor market in the process of adjusting wage level, and then they will slowly stimulate the increase of production and gradually return to the long-term balance. In this process, with the decrease of wage level, the economy may be in a long-term recession, It makes the economy adjust itself ineffectively

Policy Recommendation – AE Model

AE model has no way to analyze the long-term equilibrium state. No matter before or after the cowid-19 impact, the total demand is equal to the total production, which is in the short-term equilibrium state of the economy, so there is no way to analyze the self correction

But he can analyze the advantages and disadvantages of different policies

If we propose to adopt expansionary monetary policy, what will be affected is to lower interest rates, so as to increase autonomous consumption, planned investment. Because it reduces the repayment pressure of consumers, increases their disposable income, reduces the cost of business, and increases the potential return of investment. Moreover, if we improve the future consumer confidence, it will also increase the C, So the effect is AE shift up, rotate up
It will return to the state of Ae0. At the same time, there will be amplification effect – by increasing Ca, IP and AP, expenditure multiplier：

If we adopt an expansionary fiscal policy and suggest that the government increase government expenditure, then increasing g and enlarging the effect is also the expansion multiplier, but it will increase the government’s financial burden and also have a negative extrusion effect. Because raising government expenditure will lead to higher interest rates and crowd out private spending

If it is an expanding fiscal policy, it is suggested that the government reduce tax to improve the public’s disposal income to improve the induced consumption, the amplification effect is tax multiplier, which is relatively small, and also increases the financial burden of the government, but it will not have extrusion effect：

2