• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

the limitations of Fiscal Policy

Extracts from this document...

Introduction

Executive Summary This report will explain why fiscal policy should be used in medium to long run macroeconomic stabilization rather than in the short run. Limitations of fiscal policy is pointed out such as time lag and current goal of Australian government in the short run using monetary policy to counter recession facing by the world. Furthermore, looking back to 1980s and 1990s budget balances, fiscal policy was majorly used in order to eliminate foreign debt and achieving budget balance and surplus. Some data from the Reserve Bank and Australian Government is used in this report to support the statement. In addition, this report also includes one of the current issues in Australian government, which is the future demographic change that would affect the economy. Lastly, a conclusion will summarized every point that explain why fiscal policy should be used in the long run macroeconomic stabilizations and bibliography is also included in order to appreciate the work of the original writer. Introduction Fiscal policy is the macroeconomic policy that is used by the government to achieve macroeconomic stabilization by changing the tax rate and government spending. The macroeconomic stabilizations in Australia are low unemployment rate, low inflation rate, equality in the income distributions and to close the output gap in the ...read more.

Middle

For example, RBA cut down the interest rate from 7.25% to 7% in order to increase the consumption and investment expenditure in the economy. This shows how the government uses monetary policy to eliminate the recessionary gap (Y* - Y) by changing the nominal interest rate and money supply in the economy. Figure 1 shows the changes in nominal interest rate from 7.25% to 7% could eliminate the recessionary gap in the short run which lead to increase the consumption and investment from I1 to I2 and in the end, lead to increase in output from Y to Y*. Changes in nominal interest rate would directly change the real interest rate assuming that inflation rate (?) is constant in the short run. Equation E.1, called as Fisher equation, shows the direct relationships between real interest rate (r) and nominal interest rate (i) when government changes the nominal interest rate in the overnight cash market. In addition, government may use money supply to control interest rate in the economy. However, when government takes control of money is used to eliminate the recessionary gap, the effect of changing the budget would take effect in a longer time. ...read more.

Conclusion

Conclusion In conclusion, the limitations of fiscal policy such as time lag and influence of political view explains why fiscal policy should not be used in short run period but in the long run macroeconomic stabilizations. Secondly, with the goal to eliminate the recession gap in the short run, government uses monetary policy instead of fiscal policy because nominal interest rates have a direct relationship with real interest rates as Fisher equation shown. Furthermore, the success of fiscal policy in eliminating the budget deficit and foreign debt in 1990s and achieved budget surplus by charging high tax rate lead to increase in National Saving shows that fiscal policy should be used in long run macroeconomic stabilizations. Thus, from the National Saving, Australian government paid the foreign debt. In the end, with an expectation of demographic change in Australia, the government has to adjust their current fiscal policy so that budget surplus would not always be the goal but to counter the future spending such as health care and public transport for the aging population which are highly more than proportionate birth rate in the future. Therefore, this report explains why fiscal policy should be used in long run macroeconomic stabilizations but not for short run. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. What are the main macro-economic policy objectives?

    Government has restriction for imports, for example, it should be passed by the required Authority and standardize the goods; set up the Quotes and import duties.

  2. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    However this data does bring into question the importance of the MPC in controlling this inflation. This is because the data also shows that the levels of RPIX inflation have been within the government tolerance since the beginning of 1993, which is when Norman Lamont, the Chancellor of the Exchequer

  1. Budget 2004-05 and Economic Analysis of Pakistan

    GNP at factor cost exhibited a deceleration in growth from 7.9 percent in 2002-03 to 5.2 percent in 2003-04 mainly due to a decline of 30.5 percent in net factor income from abroad. SERVICES: The services sector has also registered handsome growth of 5.2% against the target of 5.0%.

  2. To what extent does the government budget/statement reflect current government priorities?

    In attempts to keep these groups happy the government invests more money every year to meet their demands. Examples of these include the �800m environmental transformation fund and funding for cleaner ways to produce energy such as wind farms and nuclear power.

  1. Unemployment Report.

    Neo Classical Unemployment (Business Cycle theory): This model emphasizes real, rather than monetary shocks. Real shocks are actual events which have a significant impact on the supply side. This impact may be bad, e.g. the oil crisis or good such as the advent of new technology.

  2. Examine the difficulties which confront policy makers when they attempt to formulate macroeconomic policy.

    - an indication that the economy produces a greater volume of goods and services. The next step is to decide how the government will achieve the objectives. The government has at its disposal a number of devices called policy instruments, such as government expenditure, taxation levels and interest rates, which it directly controls.

  1. What ended hyperinflation in Germany, Austria and Hungary in the 1920s? Do the facts ...

    The loss of territory also led to segments of textile industry in different countries and raw materials supplies separated from industrial centers. Moreover, large-scale unemployment caused serious problems for postwar activities and the new national border. As the loser of the war, Austria also owed a huge amount of reparation.

  2. Various Macro-Economic Questions and answers

    Similarly, higher expected inflation encourages spending now before price increases come into effect - a short term boost to AD. When confidence turns lower, we expect to see an increase in saving and some companies deciding to postpone capital investment projects because of worries over a lack of demand and a fall in the expected rate of profit on investments.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work