Reference no: EM132548841

Question

Assume the Australian economy is originally at the long-run equilibrium. An abrupt house price crash sends shockwaves throughout the economy.

In response to such a shock, households bring their spending on durable goods to the bare minimum, while firms cancel all future upgrade or expansion projects.

Required:

(a) Explain how the long-run aggregate supply (LRAS), the short-run aggregate supply (SRAS) and the aggregate demand (AD) will be affected by the above shock. Clearly explain why such change(s) would occur.

(b) Clearly explain how the above shock would affect the key macroeconomic variables (real GDP, unemployment rate and price level) in the short run.

(c) In order to counteract the above shock, do you recommend the government to implement expansionary fiscal policy or contractionary fiscal policy? Clearly explain why.

(d) Clearly explain what actions the government can undertake in order to implement the fiscal policy stance recommended in (c).