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Using the AD-AS model show how the Australian economy avoided recession last year when 8 of its trading partners fell into recession due to the GFC. What economic policies were used?

For them to avoid the economic recession that was brought about by the global financial crisis, the Australian government came up with a reaction policy aimed at stimulating the aggregate demand mainly by increasing the levels of expenditure on investment and consumption. This led to an increase in the level of Gross domestic product, which is a function of consumption, investment, and income. This is illustrated in figure below.

On aggregate demand and increase in GDP

Price level P and Q indicates Australia’s equilibrium price level and GDP, respectively. An economic recession brings about inflation, as shown by PP1 hence reducing the country’s GDP by QQ1. To counteract this increase in the price levels, the government of Australia decided to increase the investment and consumption expenditure leading to an increase in GDP by QQ11, hence a reduction in the price levels as shown by PP11.

The economic policy that was used to achieve this is the fiscal stimulus policy. This included “a mix of income transfers to select groups and new public expenditure mostly on different types of infrastructure.” This led to an increase in the aggregate demand and the GDP.

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Academic.Tips. (2022, July 21). Using the AD-AS model show how the Australian economy avoided recession last year when 8 of its trading partners fell into recession due to the GFC. What economic policies were used? https://academic.tips/question/using-the-ad-as-model-show-how-the-australian-economy-avoided-recession-last-year-when-8-of-its-trading-partners-fell-into-recession-due-to-the-gfc-what-economic-policies-were-used/

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Academic.Tips. 2022. "Using the AD-AS model show how the Australian economy avoided recession last year when 8 of its trading partners fell into recession due to the GFC. What economic policies were used?" July 21, 2022. https://academic.tips/question/using-the-ad-as-model-show-how-the-australian-economy-avoided-recession-last-year-when-8-of-its-trading-partners-fell-into-recession-due-to-the-gfc-what-economic-policies-were-used/.

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Assuming that the money market is initially in equilibrium, trace through the effects of a contraction in the money supply on the money market, on the interest rate and also on output, employment and the price level. Under what circumstances would the central bank undertake this type of policy?
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