Macroeconomics

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

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

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

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

Comments and observations (4 marks)

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:

· 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.

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.

SRAS

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Price (P)

Output (Y)

Pn

P1

Yn

Y1

LRAS

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.

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