Semester 2, 2020
Tutorial Day & Time:
Writing material for a Policy Brief
Now that you have developed an understanding of the policy tools that are available to address economic challenges, your task is to prepare material that will go towards a Policy Brief on Australia’s recovery from the COVID-19 pandemic-induced recession.
Imagine you are now employed as a Graduate Economist working for the Australian Treasury. As part of the Federal Budget, your team is responsible for putting together a Policy Brief for the department that summarises some key aspects of the government’s policy responses to the COVID-19 recession, and provides policy analysis to lead the Australian economy back to recovery. You have a very important job!
Your task is to provide clear answers to the following queries that have been requested from your department manager, using the knowledge and skills that you have gained from your macroeconomics course.
1) Fiscal policy
The Australian Government has implemented an unprecedented package of fiscal policy measures to manage the economic impacts of the COVID-19 pandemic.
In his 2020 Budget speech, the Australian Treasurer Josh Frydenberg announced that the Australian Government had, so far, injected $257 billion of direct support into the Australian economy, in attempt to cushion the impact of the pandemic and fuel the country’s economic recovery.
In the Federal Budget, the Treasurer announced that the Australian economy is forecast to grow by 4.25% next year, and that unemployment is expected to fall to a rate of 6.5% by the June quarter of 2022.
Source: The Hon. Josh Frydenberg MP, Treasurer of Australian Government, Economic recovery plan for Australia, https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/economic-recovery-plan-australia (Accessed 6 October 2020)
a) Your Policy Brief will provide some background information on the role of fiscal policy in the economy. Provide a short explanation of the 3 levers of fiscal policy that the government can use to manage the economy, and explain what is meant by the fiscal multiplier effect’. (2-3 sentences)
b) The ABS has reported that, during the pandemic, the housing saving ratio in Australia has risen notably. The following chart from the ABS shows how the fraction of income that households are allocating to saving jumped to 19.8% in June 2020.
Explain how this increase in saving would affect the size of the multiplier. In other words, would a higher saving rate strengthen or weaken the multiplier effect, and why? (2-3 sentences)
Source: ABS, Australian National Accounts: National Income, Expenditure and Product, https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release#:~:text=Household%20saving%20ratio%20increased%20to%2019.8%25%20from%206.0%25. (Accessed 4 September 2020)
c) Your next task for the Policy Brief is to compute the numerical value of the fiscal multiplier in current economic conditions.
To calculate the value of the multiplier, you have information showing that Australians pay an average rate of 24% in income tax, and that Australians spend about one-sixth (16%) of their income on imports.
To figure out the other information that you will need to calculate the value of the multiplier, you should use the ABS data from the previous question (part (b)) on the household saving ratio for June 2020.
When you undertake your calculation, your manager has asked you to provide the formula for the fiscal multiplier and provide the full steps of your working, to show how you arrived at your answer. Round off your final answer to 2 decimal points.
When you present your answer, write a clear sentence explaining how to interpret this final number.
d) Now that you have computed the value of the multiplier, calculate your forecast of the overall impact of the government’s $257 billion stimulus package once the full effects are circulated throughout the economy.
You can use the value of multiplier rounded off to 2 decimal places, and present your final answer also rounded off to 2 decimal places.
Again, be sure to show all your working because this will be needed in the Policy Brief.
When you present your answer, write a clear sentence explaining how to interpret this final number.
e) The Federal Budget has estimated that the Australian Government will run a budget deficit of $213.7 billion, and accumulate a net debt which will peak at $966 billion in 2024. This net debt figure is the equivalent of 44% of GDP (Source: Australian Treasury, Budget Overview 2020-21 https://budget.gov.au/2020-21/content/download/glossy_overview.pdf)
Your team of economists is anticipating there is going to be a lot of concern in the general public about the growing size of the government debt, as indicated in the news headline presented below. This concern needs to be addressed in the Policy Brief.
In your contribution to the Policy Brief, you have been asked to write a simple explanation of what is meant by a ‘budget deficit’ and what causes a government’s budget deficit to rise? You should make reference to the formula for the government’s budget balance that we learnt in class (2 sentences)
Source: ABC News, Federal Budget 2020 reveals Australia headed to record debt of almost $1 trillion https://www.abc.net.au/news/2020-10-06/budget-2020-tax-cuts-deficit-coronavirus/12731914 (Accessed 7 October 2020)
f) Following on from part (e), explain why a government accumulates debt? Should Australia be worried about running a large budget deficit and accumulating such a large debt in current economic conditions? Provide reasons to support you answer why or why not. (2-3 sentences)
g) In writing your Policy Brief, you have gained information from researchers from the University of Canberra who have calculated the changes in the Gini Index for Australia between March and June 2020.
Their modelling estimates that the Gini Index would have risen in Australia if it had not been for the fiscal policy support that the government implemented during the pandemic.
How do you interpret a rise in the Gini Index? If the Gini Index increases, should policymakers be concerned or relieved, and why? (2 sentences)
2) Monetary policy
The Treasury is paying close attention to the policy responses that Australia’s central bank, the Reserve Bank of Australia (RBA), is taking to help mitigate the economic fallout of the COVID-19 pandemic.
a) For the Policy Brief, you have been asked to write some background information on the role of monetary policy in managing the economy.
Explain what is meant by the terms ‘contractionary monetary policy’ and ‘expansionary monetary policy’? As part of your explanation, explain in what circumstances would a central bank implement contractionary monetary policy and in what circumstances would it implement expansionary monetary policy? In your answer, consider the macroeconomic objectives that a central bank is responsible for in its charter (3-4 sentences)
b) Based on the announcement that the RBA Governor made in March 2020 (see the RBA statement), what type of monetary policy did the RBA implement? What action would the RBA need to take to achieve this change in the cash rate, in terms of Open Market Operations and altering the money supply? (2 sentences)
Source: RBA, Statement on Monetary Policy https://www.rba.gov.au/media-releases/2020/mr-20-06.html (Accessed 18 September 2020)
c) Your Policy Brief needs to include a visual depiction of the RBA’s monetary policy with the use of a AD-AS diagram. One of your colleagues in your team has started drawing the diagram – they made a good start but then got called away for another work project. So your task is to finish off the missing pieces of their diagram. You will find their partially-completed diagram on the next page.
The diagram is intended to firstly illustrate the negative shock to consumption and investment caused by the pandemic. It is based on the simplified assumption that, before the pandemic, the economy was at Y*.
On this diagram, you also then need to also represent the RBAs monetary policy response that was announced in the RBA Governor’s Statement above in relation to the change in the cash rate.
To be published in the Policy Brief, it is essential that your diagram includes all the elements of a professional diagram, so don’t forget all labels and all other essential components!
To accompany your diagram, you also need to write a short description to explain what is happening in the diagram and the final effect on the economy. Because you are talking about monetary policy, you should be sure to mention what happens to money supply and interest rates, and mention which component of the economy is affected by the change in interest rates.
To finalise your answer, be sure to also state what will happen to output and price level after monetary policy has been implemented.
You can write your description in the form of a bullet points. (You should include at least 5 bullet points to describe these steps)
You can use the following diagram (the diagram that your colleague began working on) as the basis for your diagram.
Diagram for part (c): Illustration of effect of negative shock of pandemic, and effect of RBA’s monetary policy response – for you to complete
Use these bullet points to explain the negative shock of the pandemic and effects of the RBA’s monetary policy response, with reference to your AD-AS diagram:
d) The RBA has said that it will keep the cash rate low until it is confident that the economy is back on track to recovery.
Using ABS data, you have computed that, prior to the Australian economy being negatively impacted by the COVID-19 pandemic, the unemployment rate was 5.22% in March 2020. This figure provides a benchmark metric for us to aim for as we strive to restore the economy back to its pre-pandemic levels.
Using the ABS data in the following table, and focusing on the August 2020 figures (the most recent month of data available), calculate how many percentage points does the official unemployment rate still need to fall, in order for the economy to return to the March unemployment rate?
According to the data in the table, in which month of 2020 did the labour force participation rate drop to its lowest rate, and what was this rate?
To support your calculations, include all your working and the formulas you applied to compute the unemployment rate. Round off your answers to 2 decimal points.
When you obtain your answers, write a clear sentence that addresses the specific questions that have been asked.
Labour market statistic March 2020 April
2020 August 2020
Employment (000s) 12,997.0 12,389.6 12,125.4 12,353.2 12,472.4 12,583.4
Unemployment (000s) 715.8 841.3 922.3 993.0 1008.3 921.8
Labour force (000s) 13,712.8 13,230.9 13,047.7 13,346.2 13,480.7 13,505.2
Civilian population aged 15 years and older (000s) 20,806.5 20,816.1 20,825.6 20,835.2 20,844.0 20,852.8
Source: ABS, Labour Force, Australia. Cat. no. 6202.0. Labour market data are seasonally-adjusted series.
3) Innovation policy
In addition to the use of fiscal and monetary policies to restore the economy to reach its existing full productive capacity, your Policy Brief team is also responsible for developing policy recommendations that will expand Australia’s economic productivity capacity further. Informed by your economic studies, you know that innovation policy plays an important role for bolstering the country’s economic prosperity and living standards over the longer-term time horizon.
a) Explain what factors can motivate innovation? What can a government do to foster more innovation in the economy? (2-3 sentences)
b) All around the world right now, there are many pharmaceutical and biotech companies striving to invent a vaccine for COVID-19. Patents and other intellectual property rights are one possible way to incentivise innovation among private entrepreneurs.
What are the downsides to offering patents and intellectual property rights when we are hoping to find a vaccine for COVID-19? What do these downsides imply about the potential role for government in this innovation process? (2-3 sentences)
c) What are some inequality and diversity issues that policymakers need to keep in mind when thinking about the role of innovation in the economy? (2-3 sentences)
d) As one recommendation of a type of innovation that would permanently expand the productive capacity of the economy, your Policy Brief team has modelled the effects of investing in scientific research that would develop ways to more effectively use renewable energy sources in production methods. This new innovation could then be widely disseminated for uptake by businesses throughout the economy. This new innovation would bring down the production costs for businesses, and enable the economy to make even more productive use of our existing resources.
Illustrate the predicted effects of renewable energy innovation using an AD-AS diagram. Provide bullet points to explain what is happening in your diagram. As with all of your diagrams, be sure to indicate the original and new equilibrium points, and what happens to output and price level.
Diagram for part (d): Illustration of effect of new innovation – for you to complete
Use these bullet points to explain the impacts of this new innovation on the economy, with reference to your AD-AS diagram:
4) International collaboration and globalisation
When forming your policy recommendations, your Policy Brief needs to consider the ways that the Australian economy is part of the Asian-Pacific region and connected to the rest of the world. Your team is analysing the ways that all countries need to interact with each other for the purpose of elevating economic prosperity and overall wellbeing.
a) Provide an explanation of what is meant by the term ‘globalisation’ and explain how does globalisation contribute to improving people’s wellbeing? (2-3 sentences)
b) As the whole world looks for a road to recovery from the COVID-19 pandemic, give some examples of the ways that international collaboration and co-operation will be important for our recovery? In what ways might this international collaboration be under threat during the pandemic, and what policy arrangements and institutional settings can help to ensure that countries continue to co-operate with each other in the future? (2-3 sentences)
5) Principles of good policy design
a) Managing economic challenges and coming up with policy solutions is a tricky task. When striving to optimise overall wellbeing, every policy decision involves some sort of trade-off. An essential element of good policy-making is to consider these trade-offs, by weighing up the costs and benefits, across the short-term and long-term, and identifying the winners and losers of a policy change.
What have you learnt in this course about trade-offs? Referring to any of the topics that we have covered in this course, give an example of a trade-off that policymakers need to consider. In your discussion, you should aim to make reference to the economic concept of ‘opportunity cost’. (2-5 sentences)
b) To help inform your thinking about policy recommendations, what have you learnt in this course about the role of confidence in explaining and influencing what happens in the economy? In providing your answer, consider how the Australian Government announced in its Federal Budget that it planned to give income tax cuts to households, as a way to stimulate more spending and boost economic activity. In what way does this tax cut policy depend on people’s overall level of confidence, and what is your own assessment of the likely effectiveness of this policy given the current pandemic environment? (2-5 sentences)
Learning from real-world economists
Throughout the whole of this course, we have looked at the insights of many real-world economists. For this task, assume you have been invited to organise an online webinar event for the Economic Society of Australia (ESA), which is the peak professional organisation for economists in Australia.
This is your chance to invite any economist (from Australia or any other country in the world) and interview them on an economic topic of your choice.
The topic must obviously relate to economics, and should be a topic or issue that you have been inspired to learn more about now that you have studied this economics course. This can relate to any of the material that we have covered since the beginning of the course.
(For this particular task, you may choose to source some external information to find out more about the work and biography of your potential guest economist and the topic you are inspired to learn more about. You should include references to any external information sources that you use.)
a) Write a short proposal which outlines the topic of your webinar event. The proposal should describe your topic and explain how this topic is relevant or meaningful to people in today’s society. (2-4 sentences)
b) Prepare a short biography of the economist who you are planning to invite, which highlights the way that their work and expertise relates to the topic. Include a link to a suitable website to the economist’s professional profile page or another suitable website related to their affiliation or work (2-4 sentences)
c) Prepare 3 questions about this economic topic that you plan to ask your guest. (3 sentences)
Preparing for your future
1) Interview preparation
Imagine you have now graduated and have applied for your dream professional job. You have progressed it to the shortlist of candidates where you are now being interviewed by your prospective employer.
Imagine that the panel of interviewers ask you the following question:
“Tell us about a time when you collaborated professionally as part of a team. What are some benefits of working in a team? If you encountered any challenges, what types of difficulties can arise in within a group, and what strategies did you use (or would you use next time) to overcome these challenges? Even if you haven’t encountered any challenges, what factors have you identified as being important for successful teamwork?”
Reflecting on about your own experiences in this course, imagine that you are responding this question in a professional interview and provide your answer. The purpose of this question is to give you the opportunity to show that, through your experiences, you have gained an awareness of the factors that matter for collaboration and teamwork. If you undertook the Collaborating Online micro-credential, you might like to also draw on the insights that you gained from that course. (3-5 sentences)
This final part of the assignment is an opportunity for you to reflect on your overall experience studying this course this semester. This self-reflection exercise also serves as a way to help you identify your strengths, and to learn how to articulate your skills and abilities for when you engage with your prospective employers.
a) What are 3 new skills, competencies or insights that you have gained from this course that will be helpful and relevant for your future? This can relate to any aspect of the course from the start of the semester. (1-2 sentences for each one.)
b) Lastly, you are also encouraged to think about a personal attribute or character trait that you have developed or strengthened throughout this semester at university, especially given the exceptional challenges posed by the pandemic. What is one way that you have developed personally throughout this semester that you feel will be an asset for you in your future? (1-2 sentences)
This completes your assignment.
Please note that, unless stated in the particular assignment question, there is no need to provide additional references or undertake additional research for this assignment, as your answers should be based on the knowledge that you have now gained by doing this course.
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