Question

A. During the COVID-19 crisis, did the Australian government embark on an expansionary or contractionary fiscal policy? In this time of uncertainty, if the government was to use the tax policy (T), explain how this will help to restore the economy. Alternatively, if the government was to use government expenditure (G), explain how this will help to restore the economy.

B. What is fiscal balance? How will the two fiscal policy measures described above in part A of this question affect the fiscal balance? Explain your answer.

C. Explain why the multiplier effect of a similar amount of money spent on welfare payment (job seekers and pensioners) is different from that spent on government infrastructural development such as roads or schools?

D. During the COVID-19 crisis, the Australian government allows for early release and easy access to superannuation (retirement savings). Explain how this easy access to superannuation is expected to help restore the economy.

Answer 1

39. The Australian government is using the expansionary fiscal policy in the time of COVID 19. This is because the government has resorted to  fiscal packages and more government spendings to restore the economy. This constitutes expansionary fiscal policy.

If the government uses the tax policy as part of expansionary fiscal policy, then the reduction in tax rates will put more money in hands of the individuals in the economy. With more money in hand or increased income, they will consume more and due to this aggregate demand will rise in the economy giving rise to more economic activity which will correct the recession like situation created by COVID 19.

Similarly, more expenditure by the government as part of its fiscal policy will also increase the economic activity in the economy through the government spending multiplier. Again, it will impact the aggregate demand in the economy and hence correct the recession like situation created by COVID 19.

40. Fiscal balance refers to the situation where the total revenue of the government equals its total spending. It is also referred to as the net lending and net borrowing of the government.

If government reduces taxes, it will reduce the total revenue of the government. This might lead to fiscal imbalance.

On the other hand, if the government increases its expenditure, it will also lead to fiscal imbalance through more spendings of the government while the total revenue remains the same.

41. If the government spends more money on welfare payments, it will put money in the hands of unemployed. However, this generation of income will not be against any actual increase in the production of goods and services.

On the other hand, with the government spending on infrastructural projects, more income will be generated along with the rise in actualproduction of goods and services and capital formation in the economy. This is good for the economy in the long run.

42. This easy access will give individuals a flexible access to their savings. In a way, this implies more money they can spend or consume now which was earlier deferred for the future consumption. More money will lead to more consumption which will ultimately lead to rise in aggregate demand. This will help restore the economy.