Managing the business cycle

Government economic goals:

• Sustainable and long-last economic growth

• Internal balance

• Full employment

• Price stability

• External balance

• Stable exchange rate

• Free trade environment (good relationship with other countries)

• Improved standards of living

• Equitable distribution of income and wealth (low Gini co-efficient)

Government Roles in economy:

Allocation Role:

• Taxation

• Government spending

• Public sector production

• Education

• Transport

• Infrastructure

• Healthcare

• Defence

Distribution role:

• Having progressive tax system to redistribute income from high-low income earners, through:

• Income tax brackets

• Aged care pension

• Disability support

• Unemployment benefits

• Student allowances

Stabilisation Role:

• Fiscal policy, which the government managed directly

• Monetary policy, which the government manages through the RBA

Fiscal policy:

• Relates to the anticipated changes in the levels of government revenue and expenditure

• It involves the reallocation of resources and income

Expansionary fiscal policy:

• Involves an increase in expenditure to stimulate the economic activity and reduce unemployment

• It can involve financing a large scale project, such as major high way or new hospital

• Expansionary fiscal policy is used in a downswing before an economy enters through

Contractionary fiscal policy:

• Involves a decrease expenditure to contract demand and economic activity and to curb inflation

• It can involve cutting funding in to the sector, such as health and education

• Contractionary fiscal policy is used in an upswing before an economy hits a peak