gov econ policy

Satisfactory Essays
Government Economic Policy

In 1988 the government of the day was at a downswing of the business cycle with high unemployment rate (UE%) coupled with high inflation. This caused the real income (YR) to fall. The populus of Australia had less purchasing power causing the aggregate demand to fall (ÓD). With the people of Australia spending less and firms not selling enough inventories the government (G) had less taxation revenue and with firms trying to cut costs, they laid off workers. This caused G non-profitable expenditure (G1) to increase and thus caused deficit budgets. This is when Private Investment (I), Economic Growth (GDP) and Private Consumption started to fall tremendously.

In later years the G borrowed money from other nations because worsening Fiscal policy. The trouble was that the G was borrowing to pay G1 expenditure not G2. This caused a lack of I multiplier effect within the economy. The lack of money circulating in the economy lowered the Production Possibilities Curve (PPC) making the nation not able to provide enough goods and services for the people. If we look at the aggregate supply equation (Ó supply= GDP+ imports (M)), when GDP falls imports are the only option have enough supply to satisfy the economy. Making the overseas sector the only means cheap enough to buy goods and services from. Consequently this acted as a leakage because money was flowing into other nations and not into Australia’s.

The PPC graph shows Australia’s shift in GDP with the PPC moving from A to B. therefore the difference between A and B is imports.

This made economic conditions worse. As a result of the high inflation and UE% the national savings pool and thus private investment fell and foreign ownership rose. With all the money going out of the Australian economy and into others’ this caused stagflation. Stagflation occurs when an economy doesn’t grow (GDP doesn’t increase) but inflation increases. The inflation type is cost-push inflation.
This graph shows cost-push inflation by showing the shift in aggregate supply causing a shift in the price (due to the law of demand) thus causing inflation, but in this case stagflation.

Finally the Australian economy is ‘busted’ AKA recession. This was due to a number of factors one of these was the Terms of Trade (TOT) falling. This caused Australia’s main industry ‘agriculture’ to be severely effected. With the Interest rates ( I %) rising for long periods of time this caused strong decline in private investment, lessening the multiplier effect.
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