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How Does Fiscal Policy Affect Australian Economy

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Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate our economy (Investopedia, 2018). They are interconnected and subsequently serve as guidelines to maintain positive economic growth, aim for full employment and sustain low inflation.

The Reserve Bank of Australia implements the monetary policy, which is the main macroeconomic policy in Australia used to stimulate the level of Australia’s economic growth and maintain a strong financial system. The policy is predominantly concerned with influencing the demand and supply of money and credit in the economy, primarily through the use of interest rates in order to achieve the three main government policy objectives. These includes low inflation, reducing the level of unemployment and stimulating the economic prosperity and welfare of the Australian people (Tim Dickson & John O’Mahony, 2009). This is cumulatively achieved through the actions by the Reserve Bank of Australia, on behalf of the government, specifically, through the main instrument …show more content…

Specifically, when there are fluctuations to taxes, high unemployment rates and government spending on goods and services. Therefore, when the government applies expansionary fiscal policy it affects all Australians as it seeks to expand the amount of money available to the population to encourage economic growth (Investopedia, 2018). This has positive effects on the GDP and private investments as this increase in money supply allows consumers to pay less tax. This results in more disposable income and successively allows consumers to spend more causing an increase in the demand and supply of goods and services. This subsequently allows business to make capital expenditure and therefore decreases the number of

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Especially during the Great Depression, many Canadian men and women had become unemployed because of this. It had changed the economy because less was needed so less was made. This would slowly, but surely, force people out of their jobs. This had affected the ever-increasing amount of unemployed during the Great Depression greatly. Following the fall of the economy, many consumers were unable to buy, or consume because they were unemployed, which resulted in a drop in production.

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The Federal Reserve is one of the most powerful entities we have in the United States. The decisions that are made by the Federal Reserve will have an impact on every person that is living in the country of the United States and will have an impact on the global market. Two ways that the Federal Reserve may impact a person’s life and the global market are by inflation and monetary policies. Inflation is the sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. (Investopedia)

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Abstract The Federal Reserve is the central banking system of the United States that was signed in 1913 by President Woodrow Wilson to promote a strong American economy. This independent system provides monetary policies which help create a high employment rate and positive attributes to obtain a stable financial system that benefit the people of the whole nation. It was primarily created to control the money supply and encourage the banks of the country to provide a secure place to ensure the money. However, this system also can create a negative effect due to the way it manipulates interest rates and ability to devaluate currency.

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During the 2008-2009 recession, the nation experienced its economy downturn. The United States government jump-start the economy using spending policies. The government has the power to lower or increase taxes and can spend by purchases to promote the level of production output to stabilize the economy. The government stepped in and intervened using fiscal policy, a method known as Keynesian economics. The fiscal policy allows the government to adjust spending level, and tax rate.

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What are some recent examples of what the Federal Reserve has done to help with monetary policy during “The Great Recession” and what are their goals right now? Has their policies been successful? What is the future of American monetary policy and the actions of the Fed? a. The Federal Open Market Committee pursues to explain its monetary policy decision to the public as clearly as possible. Recently, during a meeting, the FOMC issued a statement referring its longer goals and monetary policy strategy.

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The Fed’s main desirable goals are low unemployment, economic growth, price stability or low inflation, and financial market stability. The Federal Reserve’s profession is to also encourage a “sound banking system” and a well economy. To reach this goal, the Federal Reserve has to fulfill as “the banker’s bank, government’s bank, and the nation’s money manager” (Investopedia). The Fed also sells and saves the government’s securities, which supplies the country’s paper currency.

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In Australia, the way the RBA applies monetary policy is through the short term interest rate or the cash rate. The RBA very closely controls the cash rate; the Board of the RBA meets on the first Tuesday of every month except January, where the developments of the Australian economy and international economies are analysed. From there decisions are made as to what changes, if any, to the interest rate will be made that month to meet the objectives regarding inflation, unemployment and economic growth. As can be seen in figure 5 below, since 2005, interest rates have been decreasing. Interest rates are decreased when the circular flow has slowed down, to promote spending which leads to an increase in aggregate demand hence speeding it up.

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Fiscal policy is a way for the government to stabilize the economy. There are two ways the government can stabilize the economy increasing or decreasing taxes or increasing or decreasing government spending. If the economy is expanding too much and causes inflation, decreasing government spending and/or increasing taxes should occur. Inflation causes a currency to lose it’s purchasing power (the dollar is weak) and that causes prices to increase. Decreasing government spending puts less money into the economy which slows business investment and consumer spending as does an increase in taxes and effectively slowing down the growth of the economy and lower prices.

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Classical economics emphasises the fact free markets lead to an efficient outcome and are self-regulating. In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary. The Classical model stresses the importance of limiting government intervention and striving to keep markets free of potential barriers to their efficient operation. Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets. Keynesians place a greater role for expansionary fiscal policy (government intervention) to overcome recession.

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This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and

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Along these lines, unemployment may decrease, as this has different favorable circumstances, for example, lower government using on profits and less social issues. However, this phenomenon includes a number of different expenses. Firstly, if economic growth is unsustainable and is higher than the long run pattern rate, inflations are liable to be seen. An increase in economic growth could prompt an equalization of issued installments. In case the expanded customer expenditure causes further development, there will be an increase in the import sector.

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