Role of the policy advisors Solution

role of the policy advisors

Table of Contents

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Instructions

role of the policy advisors

Executive summary:

This is report is developed to understand the role of the policy advisors, employed by the government or big corporations by applying the skills developed under the macroeconomics. We are analysing the economic situation and its factors including inflation and Gross Domestic Product (GDP) of Australia. We discuss the economic rationale, taxes reduction, and increase in Government spending, we also make recommendations based on analysis that increase the significance of our work.

Indicator Group A

Gross Domestic Product

GDP is the monetary value of the finished goods and services produces in the specific time normally in calendar year (Investopedia, 2019). GDP is considered as the function of the economic health of the country. The worth of the GDP in the Australia in 2018 is 1432.20 billion US dollar which represent the 2.3 percent of the world economy.

In short Run

The economy of the Australia is growing, the GDP of the Australia grow from 1210 billion dollar to 1430 billion dollar from year 2016 to year 2018.

In Long Run

role of the policy advisors

In lung run the GDP of the Australia is growing and have significant increase from year 2000 to 2018, in year 2000 the GDP value of Australia was 387 billion dollar which rises up to 1432 billion dollar in year 2018.

Inflation

Inflation is a normal increase in price over time period. Inflation can be measured as the proportional change in price over time in the appropriate price index, under the consumer price index or GDP deflator (Black, Hashimzade and Myles 2017). In the graph, inflation is presented under the consumer price index. The annual inflation rate of Australia is rising, in June quarter 2019 it rises to 1.6%, according to the latest CPI the market is going up the food inflation hit the highest inflation in the last five years (Tradingeconomics, 2019).

In Short Run

role of the policy advisors

In short run the inflation is increasing from 1.28% to 1.90% from year 2016 to 2018, which shows there is significant change in the inflation over the time that means number of factor contributing in the change in inflation.

In Long Run

In long run the inflation is in decreasing trend, the inflation rate in year 2000 was 4.46% and in year 2018 the inflation rate is 1.90%. There is significant change in inflation so number of factors are contributing to the change in inflation.

Conclusion or Comment

role of the policy advisors

The overall economy of the Australia is good and in upturn in long run, which represent the economic expansion in Australian market.

Indicator 2 from the same Group B: Inflation rate

Presentation

role of the policy advisors

Comments and observations (4 marks)

role of the policy advisors

The inflation rate annually in Australia is presented in the above graph. It is observed that the overall trend of inflation rate in Australia is decreasing over the past five decades. It is seen that between 1993 to 1999, the inflation rate fluctuated from the lowest of 0.3% to the highest of 2.69%. This was the period that the Reserve Bank of Australia introduced the inflation rate goals, from 1% to 3% . However, there was a large spike in the year of 1975 (16.49%). It was recorded that, there was a major political change within the country, the dismissal of the Whitlam Government. Thus many suggested that this is the main cause for the huge inflation rate. However, the overall trend of inflation is declining with some major deflation periods (2015). This suggest Australia is currently in a recession.

Part B: Policy Brief

Briefing for Scott Morrison (Prime Minister of Australia).

Feasibility and Trade-offs

Recommendations:

 

role of the policy advisors

• Reduce corporate tax and goods and services tax
• Increase Government expenditure in infrastructure and education

Economic rationale:

According to the analysis in part A, we could see that GDP is not very stable and Inflation rate is suspected to decrease in the future. In 2015, the inflation rate surprisingly dropped to -0.7%, whilst the GDP is decelerating, this suggested that Australia is currently having a recession period where economic growth is slowed down. This brief suggest improving GDP and inflation rate through increasing aggregate demand.

role of the policy advisors

According to Kaynesian theory, the level of aggregate demand can be manipulated by the changes in taxation and the changes in government spending. In negative demand shock, aggregate demand falls, making price level and product output decrease. It is suggested that the government applies fiscal expansionary policy, which reduce tax, increase government spending or both.

role of the policy advisors

SRAS

AD2

AD1

Price (P)

role of the policy advisors

Output (Y)

Pn

P1

Yn

Y1

LRAS

role of the policy advisors

Negative demand shock

Effect of expansionary policy

Figure 1: Demand shock model and the effect of Fiscal expansionary policy

Taxes reduction:

When the government reduces the tax, household will be encouraged to spend more on goods. On the supply-side economics, businesses are also willing to spend more on investment. In more details, when tax decrease, the income of households will increase accordingly, which lead to both price level and consumption increase. Thus shifting the aggregate demand curve to the right, off setting the impact of negative demand shock.

Increase in Government spending:

When government spending increase, two affects will apply, Multiplier effect and crowding out effect. Multiplier effect suggests that the increase in government spending will cause GDP (Y) to increase more than that amount. However, the crowding out effect suggests that higher demand (caused by increasing government spending) leads to higher interest rate. Thus firm reduce their investment and decrease output level (Y). This suggests that the aggregate demand will be pushed back. The decrease will then depend on the Net effect = Multiplier effect – Crowding out effect.

AD0

AD1

AD 2

Multiplier effect

Crowding out effect

Price

Output (Y)

SRAS

Y0

role of the policy advisors

Y2

Y1

Figure 2: The net effect of AD and output level

Feasibility and Trade-offs

More practically, the government could cut down major taxes like corporate tax, as well as goods and services tax. These taxes directly affect both business investment and domestic consumption. Thus cut down a portion of these taxes could improve the output the real GDP. Nevertheless, the government should spend more savings on public infrastructure,

public transportation, medical facilities and education. These actions are very possible in consideration of Australian economic power. However, by applying this policy, it should be taken into account of the increase in price. This will cause higher inflation rate in the future. Yet, because the inflation rate of Australia in the current period is very low, hence this policy

will help balance out the inflation rate. Therefore, the trade-offs we regconised are really minor.

role of the policy advisors

An example of fiscal expansionary policy is the Economic Stimulus Payments of 2008. According to Broda C. and Parker A.J. (2014), this law made Household’s spending bloomed up to 10% in the first week and continued with a high 1.5 to 3.8 percent to over three months. Another example is the implementation of the American Recovery and Reinvestment Act of 2009, which has taken place in the great recession period in the United States of America. Most of the US government expenditure was focused on infrastructure, education. Thus it is visible that Fiscal Expansionary policy is feasible and can improve Australia GDP and stablise the economy.

References:

Tradingeconomics.com. (2019). Australia Inflation Rate | 2019 | Data | Chart | Calendar | Forecast | News . [online] Available at: https://tradingeconomics.com/australia/inflation-cpi [Accessed 10 Oct. 2019].

A Dictionary of Economics, Oxford University Press, BLACK, Hashimzade and Myles 2017

Investopedia. (2019). The ABC on GDP: All You Need to Know About Gross Domestic Product. [online] Available at: https://www.investopedia.com/terms/g/gdp.asp [Accessed 10 Oct. 2019].

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Excellent Quality 95-100%	Introduction 45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.		Literature Support 91-84  points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.			Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score 50-85%	40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.		83-76  points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.			52-49  points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality 0-45%	37-1 points The background and/or significance are missing. No search history information is provided.		75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.			48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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