Expansionary Fiscal Policy This policy can be applied to combat recession with an economic stimulus that would increase the aggregate demand and GDP. The stimulus is to increase government expenditure or decrease taxes. The government may apply both elements simultaneously. In result of government increase in spending is directly accounted for in GDP and with reduction of taxes consumers have higher purchasing capacity, which would increase AD. Furthermore, with the increase of disposable income there would be a multiplier effect in place. As there is an increase in AD, businesses would need to generate higher output levels to meet the demand of consumers. Businesses are more likely to expand to cope with AD, this will lead to an increase of job opportunities and employment. Thus unemployment rates would be decreased. Implementation of expansionary fiscal policy comes along with 3 major tradeoffs which are inflation, budget deficit and reduced private investments. The increase of AD will raise the price levels; this will make each Australian dollars purchasing value to decrease. Therefore, this would lessen the real wage. Budget deficit overs when government expenses exceed its revenue resulting the government to borrow from the private sector. Moreover, as the private sector lends money to the government the private businesses would consist less opportunity to investment resulting to a crowding out effect. The increase of government spending will have a direct effect on interest’s rates. In the long run interest rate will rise whereby, consumers will spend less and safe more to gain from the incentives of the interest rates. As interest rates rise it is less likely for investments to be carried out. In order for this policy to be feasible, it is recommended to only increase government spending and not reduces taxes. This is because as income tax decrement may be unable to provide growth
of aggregate demand to boost the economy GDP if consumer’s confidence is low. Implementation of this policy should be carried out for short-run to steer clear of drawback affected by long-run implementation. Government Education and Training Programs Figure 3: The levels of Australia’s government taxation from 2012 to 2018. In general, the government increased taxes in the years from 4% to 5%. This leads to a decline in demand for goods and services due to falling consumer income. Reducing domestic consumption is accompanied by AD reduction. This seems to be a signal for firm to reduce the level of goods that reduce employment levels. As Australia develops, it is one of the countries that favour economic development, engineers, and doctors so it will cause a problem that unemployment rate will be increased faster because they do not keep up with the skills required by the job. Therefore, by opening specialized training courses and short-term training with the government-funded, the government can better equip to citizens and guide workers towards industries and jobs that require certain knowledge and skills, reducing unemployment levels in the long run.
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