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MB113 Questions on Coronavirus and Its Impact on Economy Assessment Answer

MB113: Economics

Question 4:

" The COVID- 19 pandemic brought to an end an extended period of stable (but only moderate ) growth, low inflation, and low financial market volatility... The exceptional measures taken to contain COVID- 19 are having a major effect on economic activity and the global financial system. The high level of uncertainty surrounding the size and duration of the economic downturn is accentuated by the uncertainty around the effectiveness of the various measures in containing the spread of the virus."

Financial Stability Review April 2020, RBA 

Critically Evaluate the effectiveness of the responses of central banks and the effectiveness of monetary policy during the crisis. Apply Economic Models in your explanations wherever Applicable. 

Question 5: 

"Australia find its self  a war against a faceless and flagless enemy. The coronavirus has created a one in a hundred year event. The health and economic shock the likes of which the world has never seen."

Ministerial statement on the Economy, Josh Frydenberg

Discuss Treasure's Responses to the crisis and critically evaluate the effectiveness. Apply Economic Models in your explanation whenever Applicable. 


Answer 4:

COVID19 has turned into a global pandemic that has impacted not only lives but also economies. In order to contain the same, travel and economic activities are restricted leading to further losses. The Australian government is ensuring minimising the number of cases through isolation, social distancing, screening of individuals and providing requisite health facilities so as to contain it and return to normal. Apart from this, the government has delivered a $17.6 billion economic support package and an additional $4 billion approximately to provide required physical and mental health facilities to its citizens. However, government had to announce multiple packages even afterwards: $90billion from RBI to help banking industry for three years through funding including $15 billion from government for smaller banks, $66billion package from government towards jobseekers and welfare recipients, and $130billion package from government towards jobseekers. Apart from these, the state governments have also announced economic stimulus packages.

These economic stimulus packages are part of expansionary monetary policy where government aims to encourage investment and also help people keep their employment. The aim is to help economy to expand in these tough times. 

In 2008-09, the GFC only led to collapse of consumer demand and it could be contained with a stimulus package of around 1.8% of Australian GDP. The Australian economy was one of the few developed countries to avoid recession.

The COVID-related packages are estimated to comprise around 3.3% of Australian GDP this budgeted year. The spending is huge and the government may be required to shell out more if COVID remains uncontrolled. COVID is unique because the shock is from both demand-side and supply side and hence, the grave danger. The stimulus packages are expected to be effective in keeping the economy from going into recession.

Answer 5:

The treasury of Australia has taken multiple steps to fight COVID pandemic. In order to reduce the pressure on borrowing cost for consumers and businesses, RBA announced stimulus package on 19th March so that the businesses can support basic daily operations. RBA also announced that small business will be a priority for support. 

This was done by announcing a term funding facility for the banking system where banks will be able to access to at least $90 billion in funding at a fixed interest rate of 0.25 per cent. This is expected to reduce the interest rates for borrowers and also encourage businesses. The facility offers additional low-cost funding to banks if they expand their business lending, with particular incentives applying to new loans to SMEs.

RBA also reduced the cash rate to 0.25 per cent. It is also extending and complementing the interest rate cut by taking active steps to target a 0.25 per cent yield on 3-year Australian Government Securities.

The RBA is also purchasing Australian Government Securities (AGS) and semis in the secondary market.

Hence, these are monetary policy steps whereby more money supply is expected to reduce the interest rates and thereby, encourage spending and investment in the economy.

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