Policy Brief needs to provide some background information on the role of fiscal policy in the economy. One of your colleagues have drafted some content (see the paragraphs below) but your task is to check this content for accuracy. In the following three paragraphs, identify any content that is inconsistent with the concepts that we have learnt in this course, and provide a fully corrected version. Fiscal policy is comprised of three levers: (1) government production of goods and services, (2) taxes, and (3) government debt. Expansionary fiscal policy is an appropriate policy response when the economy is in an expansionary phase of the business cycle, whereas contractionary fiscal policy is appropriate when the economy is experiencing a downturn or recession. A risk of expansionary fiscal policy is that it can crowd out private investment and cause inflation. This is because government spending can add to competition for limited inputs and put pressure on the economy’s price l
Now that you have developed an understanding of the policy tools that are available to address economic challenges, your task is to prepare material that will go towards a Policy Brief analysing Australia’s economic recovery from the COVID pandemic and building an equitable and resilient economy in the future.
Imagine you are now employed as a Graduate Economist working for the Australian Treasury. Your team is responsible for putting together a Policy Brief for the department that summarises some key aspects of the government’s policy responses to the COVID-19 recession and provides policy analysis to strengthen Australia’s economy in the future. You have a very important job!
Your task is to provide clear answers to the following queries that have been requested from your department manager, using the knowledge and skills that you have gained from your
1) Fiscal policy and managing government budgets
- Your Policy Brief needs to provide some background information on the role of fiscal policy in the economy. One of your colleagues have drafted some content (see the paragraphs below) but your task is to check this content for accuracy. In the following three paragraphs, identify any content that is inconsistent with the concepts that we have learnt in this course, and provide a fully corrected version.
Fiscal policy is comprised of three levers: (1) government production of goods and services, (2) taxes, and (3) government debt. Expansionary fiscal policy is an appropriate policy response when the economy is in an expansionary phase of the business cycle, whereas contractionary fiscal policy is appropriate when the economy is experiencing a downturn or recession.
A risk of expansionary fiscal policy is that it can crowd out private investment and cause inflation. This is because government spending can add to competition for limited inputs and put pressure on the economy’s price level. This inflationary pressure may give the central bank a reason to raise interest rates, which can have the effect of discouraging investment. However, crowding out is only a concern when the economy is operating far below its productive capacity, such as during the contractionary phase of the business cycle.
In the context of expansionary policy, the fiscal multiplier effect refers to the overall increase in
Step by step
Solved in 4 steps
