Caused G Non Profitable Expenditure example essay topic

Government Economic Policy In 1988 the government of the day was at a downswing of the business cycle with high unemployment rate (UE%) coupled with high inflation. This caused the real income (YR) to fall. The populus of Australia had less purchasing power causing the aggregate demand to fall ('OD). With the people of Australia spending less and firms not selling enough inventories the government (G) had less taxation revenue and with firms trying to cut costs, they laid off workers. This caused G non-profitable expenditure (G 1) to increase and thus caused deficit budgets. This is when Private Investment (I), Economic Growth (GDP) and Private Consumption started to fall tremendously.

In later years the G borrowed money from other nations because worsening Fiscal policy. The trouble was that the G was borrowing to pay G 1 expenditure not G 2. This caused a lack of I multiplier effect within the economy. The lack of money circulating in the economy lowered the Production Possibilities Curve (PPC) making the nation not able to provide enough goods and services for the people. If we look at the aggregate supply equation ('O supply = GDP+ imports (M) ), when GDP falls imports are the only option have enough supply to satisfy the economy. Making the overseas sector the only means cheap enough to buy goods and services from.

Consequently this acted as a leakage because money was flowing into other nations and not into Australia's. The PPC graph shows Australia's shift in GDP with the PPC moving from A to B. therefore the difference between A and B is imports. This made economic conditions worse. As a result of the high inflation and UE% the national savings pool and thus private investment fell and foreign ownership rose. With all the money going out of the Australian economy and into others' this caused stagflation. Stagflation occurs when an economy doesn't grow (GDP doesn't increase) but inflation increases.

The inflation type is cost-push inflation. This graph shows cost-push inflation by showing the shift in aggregate supply causing a shift in the price (due to the law of demand) thus causing inflation, but in this case stagflation. Finally the Australian economy is 'busted' AKA recession. This was due to a number of factors one of these was the Terms of Trade (TOT) falling. This caused Australia's main industry 'agriculture' to be severely effected. With the Interest rates (I %) rising for long periods of time this caused strong decline in private investment, lessening the multiplier effect.

The high amount of debt within the economy both public and private caused lack of consumer confidence. This caused a further dampening of investment and consumption. In addition asset prices fell remarkably to low levels and Australia's national wealth fell with this news. This caused disinflation not to be confused with deflation, disinflation is where there is a very low level of inflation. Disinflation usually occurs when recessions are apparent and extremely good economic management is applied. During 1992-1995 to get out of the recession the G would ease the cash rate.

To allow national investment to increase. This causes a decrease in demand deficient unemployment because of the notion 'one man's spending is another's earning'. The Transmission Mechanism (above) shows how cash rates affect the sectors of the economy. Also the decrease in cash rate would allow 'OD (AD) to increase raising GDP. To combat demand-pull inflation union agreements will be signed bring stability to the economy.

This made certainty within the economy causing confidence to rise. The extra confidence causes further increase in consumption and investment. To avoid the inflation that was apparent in the 1980's the fiscal policy would contractual allowing for the private sector to gradually increase GDP, rather than G because the multiplier effect would be to strong. Also with G's huge debt surplus budgets must be run to pay of the debt. Advertising campagna's by the G trying to educate the people about the economics of buying M. This makes M go down and domestic consumption go up. Net exports (X-M) would become more positive and the dollar value would increase causing the foreign debt to decrease because 1 AUD buys more foreign currency therefore decreasing the 'real rate' of money paid back.

As a result of this the UE% would fall and more G revenue would follow. Also the G wins twice because of the UE% falling it doesn't have do pay as much G 1 expenditure causing the budget to be in bigger surplus increasing the ability to pay off public debt. At this point fiscal policy 'crowding out' can be applied allowing G to have enough funds to engage in G 2 expenditure causing injections into the economy. However the economy wouldn't over inflate because of the lag effect involved in monetary policy. If I were the G in 1992-1995 one of my fiscal policy measures to get out of recession would be to sell bonds and place the money directly into G 2 expenditure.

This would increase the AD within the economy and cause a rise in GDP. Placing protective measures on domestic goods by having quotas on M. this would decrease the availability of M and do minimal damage to international relations. Running surplus budgets 'discretionary fiscal policy' to pay off public debt. Lowering the cash rate would stimulate the national economy by increasing the consumption (C), I and (X-M) therefore raising GDP. This is due to the Transmission Mechanism. Public education spending would be increased to change the earning capacity of the economy i.e. shifting from agriculture to services.

This would provide sustained unemployment so labour shortages don't occur in later years. To add stability to the economy to encourage I long-term agreements would be signed with unions to bring price stability and foreign countries to have a quota of X each year. This would bring more wealth to the nation and stability. The cost of money would decrease because of the risk: I %. Because Australia wouldn't be seen as high-risk investment the I % will fall. As shown with the I demand curve (below).

To offset pollution because of extra economic growth trees would be planted to offset CO 2 evictions also this prevents salinity. In addition the trees can be harvested in later years and be sold as raw timber or be value added and be sold as furniture. The optimal rate of growth shows the benefits of less pollution. Trees however will reduce the social costs of pollution and provide wealth in the future required for economic expansion.

Micro economic reform (MER) will take place because of the new competition arising. A locative efficiency will occur allowing for a surplus of goods and services to inventories. This allows for cheaper exports (X) due to law of demand achieving a better Current Account (CA). This can be show with the Aggregate production function (APF) graph. In conclusion due to tight monetary policy inflation will be kept low and I will increase. Practicing 'discretionary policy' will allow for public debt to be paid.

The increase in I will allow for a multiplier effect for UE% to fall. M will be controlled with quota's allowing domestic consumption to increase. CA will have a favourable movement due to MER surplus goods and services. Certainty will increase with trade and union agreements in place causing more I. The increases in consumption (C), I and G will lead to a GDP increase, changing from a recession to a boom phase of the business cycle.

Keynesian Economic Expenditure Model (below) can show this.