The government of Australia has embarked on various policies such as Job Keeper and provision of subsidies to firms in order to reduce the severity of COVID 19 on the economy. Suppose the money supply expands such that the Reserve Bank predicts that the economic expansion is not sustainable.
Use two diagrams one for the money market and another for the goods and services (Aggregate demand and Aggregate Supply model), to explain the policy that the Reserve Bank can adopt in order to overcome the effect of increasing money supply on the economy.
> money supply increased from the equilibrium of AUD 40 billion to AUD 70 billion
> Interest was reduced to interest rate of 1.5% as part of the stimulus package for the nation to overcome the effects of COVID 19. But the equilibrium interest rate is 4%
> Assume that equilibrium real GDP is AUD 60 billion
> Assume that inflation during COVID crisis was at equilibrium price of CPI 65
> Assume that to overcome the inflationary crisis aggregate demand has to reduce by AUD 30 billion.
> Assume to restore the economy to equilibrium inflation has to be adjusted to CPI 120
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