NOTES ON SUBMISSION QUESTION 11
NOTES ON SUBMISSION QUESTION 11
(a) Discuss the various roles that fiscal policy might play in the Australian economy. Possible roles for Fiscal Policy:
(i) Aggregate Demand Management for Full Employment
Increase G or cut T, to increase AD and reduce Unemployment
But time lags in recognition, implementation, and effects for inflexible Fiscal
Policy, and “crowding out” of private investment expenditure are problems.
(ii) Fiscal Policy to Reduce Inflation
Cut taxes to reduce costs, increase productivity
(iii) Fiscal Policy as the Servant of Monetary Policy
Concern is for the effects of financing BDs:
Deficits lead to increased Public Debt, interest burden for future taxpayers.
This view argues for balanced budgets or “balance over the cycle”.
(iv) Fiscal Policy for External Balance
Reduce AD to reduce spending on imports.
Also “Twin Deficits” theory says that increasing Govt Saving will reduce CAD but no evidence for this in Australia.
(v) Fiscal Policy for Allocative Efficiency
Concern is for the composition of G and T
Requirement for Govt. Capital Spending (including on Human Capital) for future productivity. Tax system should provide incentives for allocative and productive efficiency
(b) What are the limitations of using expansionary Fiscal Policy to address the problem of a downturn in economic activity and a rise in unemployment?
Expansionary Fiscal Policy involves Increases in Government Direct Expenditure, G, and/or increases in Government Transfer Payments or reductions in Taxes
( i.e. Reductions in Net Taxes, T).
With regard to increases in G:
Firstly, some economists argue that increases in government expenditure can “crowd out” private expenditure and thus have little ultimate effect on aggregate demand. This
“crowding out” occurs because increased government expenditure can put upward pressure on interest rates or on inflation, and there is a consequent discouragement to private sector expenditure.
Critics of
(a) Discuss the various roles that fiscal policy might play in the Australian economy. Possible roles for Fiscal Policy:
(i) Aggregate Demand Management for Full Employment
Increase G or cut T, to increase AD and reduce Unemployment
But time lags in recognition, implementation, and effects for inflexible Fiscal
Policy, and “crowding out” of private investment expenditure are problems.
(ii) Fiscal Policy to Reduce Inflation
Cut taxes to reduce costs, increase productivity
(iii) Fiscal Policy as the Servant of Monetary Policy
Concern is for the effects of financing BDs:
Deficits lead to increased Public Debt, interest burden for future taxpayers.
This view argues for balanced budgets or “balance over the cycle”.
(iv) Fiscal Policy for External Balance
Reduce AD to reduce spending on imports.
Also “Twin Deficits” theory says that increasing Govt Saving will reduce CAD but no evidence for this in Australia.
(v) Fiscal Policy for Allocative Efficiency
Concern is for the composition of G and T
Requirement for Govt. Capital Spending (including on Human Capital) for future productivity. Tax system should provide incentives for allocative and productive efficiency
(b) What are the limitations of using expansionary Fiscal Policy to address the problem of a downturn in economic activity and a rise in unemployment?
Expansionary Fiscal Policy involves Increases in Government Direct Expenditure, G, and/or increases in Government Transfer Payments or reductions in Taxes
( i.e. Reductions in Net Taxes, T).
With regard to increases in G:
Firstly, some economists argue that increases in government expenditure can “crowd out” private expenditure and thus have little ultimate effect on aggregate demand. This
“crowding out” occurs because increased government expenditure can put upward pressure on interest rates or on inflation, and there is a consequent discouragement to private sector expenditure.
Critics of