MACROECONOMIC POLICES IN AUSTRALIA.

 MIXED MACRO ECONOMIC POLICIES IN AUSTRALIA

DISCUSS THE MACROECONOMIC POLICIES IN AUSTRALIA.

Australian governments have in the recent years aimed to achieve stable economic growth. The objectives of the economic growth are aimed at sustaining the national economic progress, reducing inflation rates and the balance of payment. The Australian government majorly uses fiscal and monetary policies to control the economy. Furthermore, wages, taxes and exchange rates are used to measure the economic state of the country. Fiscal policy involves the use of government revenue and expenditure which is prepared through the budget process. The budget preparation process considers in-puts like, tax receipts and transfer of payment from government spending. The use of monetary policy is carried out by the Reserve Bank of Australia to control the availability of money in the economy. This is controlled by adjusting interest rates and trading of government securities like bonds (Wallis, 1993).

EXAMINE THE CURRENT ECONOMIC STATE IN AUSTRALIA.

According to Harcourt (1993), Australia’s economy is the strongest among the developed nations. It is expected to be stronger in the next two years; this is according to the International Monetary Fund. It has also forecasted low unemployment rates of 5.2% and minimal inflation rates. The budget surplus that has been experienced over the last two years has lead to a decline in the interest rates; furthermore, GDP has grown at a rate of 2% within a period of one year. Studies show that the possible risk to the Australian economy is the risk of an increased inflation. To address this issue, policy rates need to be increased so as to contain inflation.

In my view, aggregate demand and supply should be at equilibrium in order to stimulate economic growth. Combinations of monetary and fiscal policies that affect the aggregate demand curve to shift to the right are good indicators of the economic growth. While when inflation rates are high, an aggregate demand shifting to the left is appropriate; this is effective in taking the economy to a manageable state. These two aggregate demand shifts, contribute to the stabilization of the demand. Aggregate supply involves the total quantity of production and the overall price levels; increase in supply shows more production. A developing economy focuses on operating at a full capacity where there is equilibrium between aggregate demand and aggregate supply.  

Demand curves                                                        supply curves                                                          

WHAT ARE THE ECONOMIC TARGETS?

The use of fiscal and monetary policies is aimed at achieving economic targets which will lead to economic growth; this is argued by Makin and Narayan (2011). The targets to be achieved by using these instruments include; reducing unemployment, inflation rates, interest rates, balance of payments, increasing the GDP, and stabilizing exchange rates. These targets will be achieved through proper application and implementation of the monetary polices. Fiscal policies are aimed at controlling government revenue and spending. This policy influences capital expenditure, exchange rates, personal spending and balance of payments. The economy can be stimulated through increasing government spending on crucial indicators of economic growth. The common aims of fiscal policy are to encourage economic growth and to reduce unemployment. The use of taxes as a fiscal policy tool can be used to reduce unemployment, through reduction of taxes. When taxes are low, disposable incomes are high, which leads to more disposable income and thus more savings and investments. The balance of payment can be reduced, through reducing government spending and ensuring that imports and exports are at equilibrium.

Langdana (2009) found out that, monetary policies are used to ignite or slow the economy. This role is executed by the Reserve Bank of Australia. The bank proposes and indicates the appropriate interest rates applicable to credit and uses bank reserves to control availability of money in the banks for credit. Inflation can be contained by stabilizing prices by use of monetary policies. When interest rates are standardized, commodity prices tend to stabilize too. When interest rates are high, commodity prices will also be high and vice-versa. Exchange rates are also stabilized using the monetary policy. When interest rates are high, the exchange rates are also high and vice-versa. Thus, to achieve stability in exchange rates the Reserve banks should ensure standardization of the interest rates. There is a direct relationship between GDP and monetary supply. With low interest rates, surplus money circulates in the economy stimulating savings and investment, which increases production and thus an increase in GDP. Aggregate demand increases when there is low inflation, low taxes and more disposal income.

ANALYZE THE RISKS ASSOCIATED WITH MACROECONOMIC POLICIES.

The use of monetary policy during recession to increase income and spending is ineffective. Although monetary policies are used to reduce inflation and unemployment, a conflict arises between these two goals. Lowering interest rates will stimulate increased money supply in the economy which could trigger future rise in inflation; this will occur if the policy will be used for a long period. High interest rates causes borrowing costs to increase, making mortgages and car loans to every expensive, and eventually stimulate inflation. When there is inflation, government bodies make decisions that benefit savers but negatively impact on borrowers.  The monetary policy takes less time to be implemented as compared to the fiscal policies which takes time to be implemented. Fiscal policies are more appropriate in igniting or slowing demand. The use of fiscal policy to decrease aggregate demand so as to reduce inflation might cause unemployment in the long run. These policies are inflexible because, they take long period before being fully implemented; the reason behind this is that, it requires a lot of formalities and consulting to arrive at an agreement.

Economics ultimately make assumptions of what will happen in the economy in the future and develop fiscal policies that correspond to those assumptions. An economic can be worsen by implementation of wrong fiscal policies based on unrealistic assumptions (Wallis, 1993).

It is evident that the macroeconomic policies are very important in ensuring a sustainable economic stability growth. However, in my view, monetary policies are more effective than fiscal policies. The implementation of monetary policies is easier and very effective in controlling the economy. Despite the setbacks arising from the use of these polices, economic indicators show that the economy will be strong, driven by increased investments, growth in employment and increased consumer spending. Thus, Australia is on the move towards economic sustainability.

REFERENCES

Harcourt, G.C. 1993, “Macroeconomic Policy for Australia in the 1990s”, The Economic and Labour Relations Review : ELRR, vol. 4, no. 2, pp. 167-175.

Langdana, FK. 2009, Macroeconomic Policy : Demystifying Monetary And Fiscal Policy, n.p.: Springer Science & Business Media, eBook Collection (EBSCOhost), EBSCOhost, viewed 24 September 2012.

Makin, A, & Narayan, P. 2011, ‘How Potent is Fiscal Policy in Australia?’, Economic Papers, 30, 3, pp. 377-385, Business Source Complete, EBSCOhost, viewed 24 September 2012.

Wallis, K.F. 1993, “On macroeconomic policy and macroeconometric models”, Economic Record, vol. 69, no. 205, pp. 113-113.