Question

The effect of the COVID-19 Pandemic in Australia . Australian authorities faced significant health and economic policy challenges during the COVID- 19 Pandemic, shutting down certain industries to protect public health. This shutdown resulted in almost 1 million jobs lost in April and May 2020, and a dramatic fall in consumers’ and firms’ confidence to spend and invest. Describe the effect that a fall in confidence had upon output in the Australian economy using a Keynesian model of the macroeconomy. Ensure that your analysis includes the following:

the components of expenditure that are affected and why;

Answer 1

In the Keynesian model, a fall in confidence affects output through its impact on aggregate demand. This includes consumption, investment, government spending, and net exports. When confidence falls, these components decrease, leading to a decrease in output in the Australian economy.

Step-by-step explanation:

In the Keynesian model of the macroeconomy, a fall in confidence affects output through its impact on aggregate demand. Aggregate demand consists of four components: consumption, investment, government spending, and net exports. When confidence falls, consumers and firms become hesitant to spend and invest, leading to a decrease in consumption and investment. This results in a decrease in aggregate demand, leading to a decrease in output in the Australian economy.

For example, when consumers lose confidence, they may postpone or reduce their purchases of goods and services, causing a decrease in consumption. Similarly, firms may delay or cancel their investment plans, leading to a decrease in investment. As a result, less money is spent in the economy, which translates to a decrease in output.

In addition to consumption and investment, a fall in confidence also affects government spending. If the government perceives a decrease in consumer and business confidence, it may reduce its own spending, contributing to a decrease in aggregate demand and output. Lastly, a fall in confidence can also impact net exports if it leads to a decrease in international trade or tourism, further reducing aggregate demand and output.