QUESTION:
In response to the recent global financial crisis the Australian government and the Reserve Bank of Australia made various interventions designed to avoid/bring Australia out of a recession. Identify the theory that supports such interventions and using the concepts of fiscal and monetary policy evaluate the success of these interventions.
ANSWER:
Recently, the Australian government and the Reserve Bank of Australia (RBA) made variety of expansionary fiscal and monetary policies to cope with the recession and bring the economy out of the recession. The government has invested $42 billion for Economic Stimulus Plan (Commonwealth of Australia 2009). Meanwhile, the RBA lowered the interest rate to increase spending (AAP General News Wire 2008 ). The theories of fiscal and monetary policies show that these interventions were appropriate and successful. Therefore, this essay will examine theories of fiscal and monetary policies that support these interventions as well as evaluate their success.
In the crisis, the government spent its budgets to recover the economy, which is known as expansionary fiscal policy. In Keynesian theory, recession is a wave of pessimism about the future and, the state has more expenditure to stimulate demand and overcome initial pessimism (Frijters, Dulleck, and Torgler 2008, 145). The theory supports the government responses to the recession by giving away $42 billion for Economic Stimulus Plan including targeted cash payments of $20.9 billion from December 2008 to February 2009, and $22 billion National Building (Treasury, 2009). As a result of these interventions, Australian consumer confidence increased by 12.7% in June 2009 (Swain 2009, 10). It also can create more work opportunities. While the global economy remains weak, these figures emphasises the appropriateness of the fiscal policy response of Australian Government.
Besides the expansionary fiscal policy, the Reserve Bank Australia (RBA) reduced the interest rate as its expansionary policy. As the RBA has a lot of money, it can set the interest rate itself, and commercial banks will align the interest rate according to the RBA (Frijters, Dulleck, and Torgler 2008, 147). Therefore, it reduced the interest rate from 7.00% to 3.50% between 2008 and 2009 (Reserve Bank of Australia 2010) in order to increase the borrowing and spending, and prevents people from saving money, thus the economic activity can increase and aggregate demand is stimulated. As a result, the real GDP growth increased 3.6% in 2008-2009 (Australian Government 2010), this can show that these interventions had an effective impact on the Australian economy.
As this essay has showed, fiscal and monetary policies were implemented in order to bring Australia out of the recession. These interventions have been successful in recovering the Australian. In addition, fiscal and monetary policies theories also support these interventions. However, the effect of these interventions will have in a short term run, so in a long term, their exact nature will matter to a large extent.Reference List
AAP General News Wire. 2008. Fed: More rate cuts needed to boost economic activity – AiGroup. Sydney. http://gateway.library.qut.edu.au/login?url=http:// proquest.umi.com.ezp01.library.qut.edu.au/pqdweb?did=1545826411&sid=2& Fmt=3&clientId=14394&RQT=309&VName=PQD
Australian Government. 2010. Australian Fact Sheet. http://www.dfat.gov.au/geo/fs/aust.pdf
Commonwealth of Australia. 2009. National building. http://www.economicstimulusplan.gov.au/community_infrastructure/pages/default.aspx
Frijters, P., U. Dulleck, and B. Torgler. 2008. Introductory Economics for Decision Makers. South Melbourne: Cengage Learning.
Swain, R. 2009. Rba Economics Competition 2009. Sydney: The University of Sydney. http://www.rba.gov.au/econ-compet/2009/pdf/second-prize.pdf
Treasury. 2009. Budget 2009-2010. http://www.budget.gov.au/200910/content/overview/html/overview_key_initiatives.htm
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