The government implements an economic policy mix involving macroeconomic and microeconomic policy in order to achieve their objectives. The three main objectives include:
• Internal stability – low inflation (price stability) and full employment
• External stability – stable exchange rate, a sustainable level of foreign debt and the current account deficit (CAD)
• Economic growth
Other government objectives include equal distribution of income and environmental management. Though, it is evident that not all of these objectives can be achieved simultaneously as some are conflicting. Thus the government must trade-off some of …show more content…
• An expansionary stance where the government plans to increase the level of economic activity through tax revenue or government expenditure. This leads to a multiplied increase in consumption and investment stimulation of aggregate demand in the level of economic activity.
• A contractionary stance where the government plans to decrease the level of economic activity through tax revenue or government expenditure. This leads to a multiplied decrease in consumption and investment dampening of aggregate demand in the level of economic activity.
• A neutral fiscal policy stance where the government plans the gap between revenue and spending to be about the same level as the previous year. This should not have an impact on the overall level of economic activity.
The current 2008-09 budget of the Rudd Government is intended to be contractionary, due to our strong levels of economic activity, but in reality appears to be expansionary. This is because of the significant amount of tax cuts government revenue. Despite these tax cuts likely to add to inflationary pressures, they were a political decision rather than economic. This proves the political constraint of fiscal policy, as opposed to monetary policy which is controlled by the independent RBA whom have the incentive to maintain low inflation despite the political situation.
Not only can fiscal policy be