Question

2. The expenditure approach to measuring GDP suggests that GDP is the total expenditure on goods and services by households (C), investors (I), government (G) and net exports (X-M). Discuss the economic policies that are implemented by the government to boost the aggregate demand in the Australian economy – mention and discuss one distinct policy for each expenditure items.

Answer 1

SOLUTION:-

(i)

* Most of the macroeconomic policies focused on the overall development and sustainable growth of the economy. This will create job opportunities, wealth and improved standard of living. In Australian economy, the key pillars of macroeconomic policies are fiscal policy, monetary policy and exchange rate policy.

* Here the government directly influence the economic activities. Thus the fiscal policies increase the level of government spending. This government spending increase the tax rates, transfer on private consumption and investment and net exports. Government have full control over these fiscal policies. This will influence the automatic stabilisers and stimulate the pack through discretionary policies and programmes.

* These automatic stabilisers will influence the aggregate demand and decline the amount of tax level in the revenue side. The sensitivity of these policies will expand during slow down and contract during boom. Most of the fiscal policies framed by the authority focused on long term development rather than short term. This long term means will ensure sustainability and make capacity over the economic units to meet the future challenges.

(iI)

* The Reserve Bank of Australia determines the monetary policy, through changing the cash rates and interest rate in overnight. The central bank also operated through the open market operations. Changing cash rate can influence the interest rate in the country and across the world.

* The exchange rate policies by the authority will shows the value of domestic currency with respect to the foreign currency. Australia followed the floating exchange rate system. So the exchange rate will changed with respect to the changes in international market conditions. The depreciation of the Australian currency improves international competitiveness in case of exports. The simultaneous rise in all of these components will increase the aggregate demand and aggregate supply.

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