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Question: innovation policy in addition to the use of fiscal and...

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Innovation policy

In addition to the use of fiscal and monetary policies to restore the economy to reach its existing full productive capacity, your Policy Brief team is also responsible for developing policy recommendations that will expand Australia’s economic productivity capacity further. Informed by your economic studies, you know that innovation policy plays an important role for bolstering the country’s economic prosperity and living standards over the longer-term time horizon.


a)      Explain what factors can motivate innovation? What can a government do to foster more innovation in the economy? (2-3 sentences)


b)      All around the world right now, there are many pharmaceutical and biotech companies striving to invent a vaccine for COVID-19. Patents and other intellectual property rights are one possible way to incentivise innovation among private entrepreneurs.

What are the downsides to offering patents and intellectual property rights when we are hoping to find a vaccine for COVID-19? What do these downsides imply about the potential role for government in this innovation process? (2-3 sentences)


c)      What are some inequality and diversity issues that policymakers need to keep in mind when thinking about the role of innovation in the economy? (2-3 sentences)

d)      As one recommendation of a type of innovation that would permanently expand the productive capacity of the economy, your Policy Brief team has modelled the effects of investing in scientific research that would develop ways to more effectively use renewable energy sources in production methods. This new innovation could then be widely disseminated for uptake by businesses throughout the economy. This new innovation would bring down the production costs for businesses, and enable the economy to make even more productive use of our existing resources.

Illustrate the predicted effects of renewable energy innovation using an AD-AS diagram. Provide bullet points to explain what is happening in your diagram. As with all of your diagrams, be sure to indicate the original and new equilibrium points, and what happens to output and price level.

Use these bullet points to explain the impacts of this new innovation on the economy, with reference to your AD-AS diagram:






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