Applied Economics - Question 1

As presented by the Australian Bureau of Statistics, Australia's economy has experienced a significant drop of 7% in the last quarter to June 2020 (Baker et al., 2020). For the previous quarter in March 2019, this country's economy has had a worse drop than a 5.9% fall stock market. Following the consecutive quarterly economy contraction and the fastest on record, we are experiencing the first national recession for the last 30 years. On the gross fixed capital, it shows a drop-down of a -0.1 from -0.5 to -4.5. It meant that Australia had lost on the aggregate demand and supply as a nation. Another notable trend is that the household spending rate slumped from -1.2% to -12.2% in the first quarter.

Quarter

cash rates

household spending

Q1

0.50%

0.30%

Q2

-0.30%

-0.03%

Q3

-7%

-5.90%

Q4

0%

0%

However, the government spending strategy saved the day after it showed positive progress to the Australian economic growth of 0.8% from 2.1% to 2.9% during Q4, as shown in the figure above. In the third quarter of September 2019, the Australian economy experienced a slowing growth rate from an upwardly revised 0.6% in the previous quarter that year. Although Australia's economy is dominated by the service sector, which carries 65% of the total GDP, the recent dominance is from the mining sector and agriculture, bringing 15.5% of the real GDP as reported by the Australian Bureau of Statistics.

Applied Economics - Question 2

Monetary policy and fiscal policies are essential elements for the economic growth of any country. Australia's economy, these elements have played a very significant role in controlling the economy. In the fiscal policy employed by Australian economists, increasing the government spending rate helped the country's economy grow. Government spending resulted in high demand for goods and services, which later increased Australia's employment rate. Secondly, the government of Australia managed to cut taxes to enhance the lending from money lending institutions. As a result, Australia's economy progressed positively during this time of recession due to the pandemic (Baker et al., 2020).

Through these two fiscal policies applied in the Australian economy, a very significant impact has been felt.  It has enabled the country's economy has been controlled appropriately. During the recession in Australia, these policies served as an essential stimulant to influence economic growth and its stability. For instance, reducing taxes by the Australian government brought a short-term impact to stimulate consumption, which later increased aggregate demand and aggregate supply. This country used fiscal policies to promote and control demand variations during the pandemic as the budgetary system is mostly used to generate short term economic effects.

On the other hand, monetary policies were applied to stimulate cash rates and spending to control cash flows in the country's economy during the pandemic. During the epidemic, the Australian government concentrated cash rates to encourage households and housing investment, partly by increasing the cash flow and wealth (Li et al., 2016). Australian government lowered the cash rates to stimulate high housing investment and improve the Australian government's economic growth. The Australian government banned the Reserved Bank as it could cause other interest rates, resulting in the economy's fall.  The effectiveness of cash rates monetary policy effectively controlled the Australian economy and facilitated its growth. Both money and fiscal policies have significantly and positively influenced the evolution of the Australian economy. The first effect is that it enabled the country to control government spending, increasing employment opportunities, and investments. Reducing the government's cash rates resulted in increased household spending and housing investments, which led to Australia's economic stability. Therefore, the Australian government has successfully utilized fiscal and monetary policies to the management of its economy. Their effectiveness was positive and greatly stimulated the economy's growth both in the long-term and short-term (Leigh, 2012).

References for Australian Fiscal Stimulus Package

Baker, S. R., Bloom, N., Davis, S. J., & Terry, S. J. (2020). Covid-induced economic uncertainty, NBER Working Paper 26983.

Leigh, A. (2012). How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects, The B.E. Journal of Macroeconomics, 12(1), Article 4.

Li, S. M., & Spencer, A. H. (2016). Effectiveness of the Australian Fiscal Stimulus Package: A DSGE Analysis, Economic Record, 92, 94-120.

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