How do these unconventional monetary policies affect

Reference no: EM133504330

Question: The impact of Covid-19 on the economy is estimated to be very large. To combat the negative impact on the economy, the Australian government implemented a fiscal stimulus package worth more than 10 percent of GDP, while the RBA reduced the cash rate to 0.1 per cent and implemented a series of unconventional monetary policies including:

-Forward guidance: the interest rate to remain at this level for 3 years

-Quantitative Easing: a target for the yield on 3-year Australian government bonds of around 0.25%

-A three-year funding facility: $90bn to be lent to banks at an interest rate of 0.25% to allow banks to increase lending to small-medium enterprises

a) How do these unconventional monetary policies affect expectations, and how will consumption and investment respond to those changed expectations?

b) Explain why the IS curve becomes steeper once we account for expectations in the model.

c) Use the expectations-augmented IS-LM model to analyse the impact of these unconventional monetary policies on the economy.

d) The Australian government also established large transfer programs including Job Keeper and Job Seeker. Building on your analysis in Part c), show how these policies impact the economy.

e) In your opinion, are there any limitations to the effectiveness of fiscal policy? Explain your answer.

Reference no: EM133504330

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