ASSESSMENT 4 : CASE STUDY.

COVID – 19 HEALTH CRISIS PANDEMIC. IT IS NOT ALL ABOUT HEALTH!

You would be fully aware of the ‘Global Pandemic’ sweeping the world. While the major focus is rightly on the health concerns for nations, the other major concerns are coming to reality – and forcing major Governments to address this looming “tsunami’ head on & very quickly!

Major economies around the globe are under siege and in danger of better crippled – if urgent economic measures are not taken.

The Australian Government, like many other major Governments have made several recent announcements in regards of combatting and attempting to reverse this looming “economic tsunami”. Some economic commentators have moved past uttering the ‘R word’ (recession) in columns, and moved onto the ‘D word’ (depression). The actions and size of the economic packages have been urgent and ‘emergency measures.’  It is in time like these (just like the GFC in 2008), that Governments fall back on an old favourite economic theory:  “Keynesian theory”.

Keynesian theories – in general: argued that the key to providing economic stability was through the control of ‘aggregate demand’, and this necessitated a larger and growing role for governments in the economy in cases of inadequate aggregate demand.

It will be of no surprise that John M. Keyne’s theories came to prevalence and became popular in the mid 1930’s; right during or at the end of “The Great Depression”. He was most influential and created a whole school of economic thought, called ‘Keynesians’.

The dramatic nature of “The Great Depression’ and the severe hardships endured (like 25-30% unemployment), caused an economic re-think. In short, the market left to it’s own devices had failed! In these times, it was “market failure”.

Keynes argued in his famous work, that the Government should use fiscal and monetary policy measures to actively ward off recessions. He argued for a bigger role of government than had previously been put forward. He created the notion of ‘aggregate demand’ (the sum of consumption + investment + net government spending + net exports), and argued it was the Government’s job to stimulate the aggregate demand in periods of sluggish economic growth. That is, when private investment spending “I”, and also consumption spending “C”, drop off and are depressed during economic downturns; it should be replaced with Government investment spending “G component”.

Keynes felt that the “laissez-faire” approach of simply waiting for the economy to tend towards full employment would take far too long. Many Keynesians disputed the natural tendency of the economy to move towards full employment (and higher economic growth) at all. Keynes famously stated that: “in the long run, we are all dead”.

Keynes stated that high unemployment (and depressed economic growth) was a result of market failure and a deficiency in aggregate demand. He felt that the Government could rectify this by intervening and using expansionary fiscal policy to stimulate demand; hire workers on public projects, reduce unemployment and create economic activity again. Most Keynesians agree that an active ‘stabilisation approach’ to monetary & fiscal policies, can help smooth out the fluctuations in the business cycle and reduce the severity of recessions.

Keynes is also responsible for the theory of the ‘multiplier’, which works with fiscal stimulus. That is why he felt that an increase in Government investment spending would be successful in stimulating the economy – because of the multiplied effect this spending would have on the economy.

This background to economic history is provided to give a comparison & parallel with the current economic situation. No two economic slumps or recessions are exactly the same; although the economic theories are still relevant. It is how you implement them!

ASSESSMENT 4  REQUIREMENTS:

To answer and complete the following ‘Case Study Questions’ conduct research on the “COVID-19 fiscal stimulus packages” announced, as well as researching well regarded economic websites (eg. Treasury department; ABS, RBA, ASX & any others). (There is some good information available).

In addition, use the Case Study introduction above (from history), as well as the diagram summary above (COVID-19 Incentives), to address and respond to the following questions:

1. What economic measures (in general summary form) has the Government undertaken?

2. Why do you believe the Government has had to action, compile and enact such large fiscal stimulus packages?

3. What has the RBA done in regards of monetary policy? What effect do you believe this will have on the overall economy, given recent interest rate moves? 

4. Has the Government targeted certain groups or demographics in these fiscal stimulus package measures?  Why do you believe the Government has targeted these particular groups?

5. What other key macro-economic factors do you believe could be utilised in these packages; or would be ‘important elements’ within this fiscal strategy to be successful?   

6. What possible obstacles could the fiscal strategy encounter, that will decrease or weaken it’s effectiveness? (NOT DIRECT HEALTH FACTORS).  

7. What are the consequences of such a large fiscal stimulus packages? Are they short-lived and easily corrected; or are they more likely to have long-term effects?  

8. Why is the fiscal package strategy (Keynesian policy) likely to have a greater positive effect, than a strategy that relies more heavily on monetary policy (Classical policy)?  

9. Has the volatility of the AUD affected the Australian economy? Do you believe it has had a positive or negative effect and why?

10. If asset prices decrease (or deflate), what impact is this likely to have on consumers/investors; and the overall economy?