BUS171 Topic 12

Government and central bank macroeconomic policies aim to stabilize the economy.
Achieve objectives such as:
- Smooth economic fluctuations.
- Prevent fluctuations from occurring.
Types of macroeconomic policy:
- Demand management policy (short run).
- Supply-side policy (long run).

Comprises:
- Government purchases (G).
- Transfer payments (e.g., pensions, unemployment benefits).
Historical fluctuation:
- Between 18% and 27% of GDP over recent decades.
- Reached 35% in 2020-21 due to COVID-19 pandemic.
Major expenditures:
- Social security and welfare: ~35%.
- Health: ~16%.
- Education: ~7%.
- Defence: ~6%.

Primarily derived from:
- Individual income tax: ~48%.
- Company income tax: ~18%.
- Goods and Services Tax (GST): 15% (transferred to states/territories).

Fiscal policy involves changes in:
- Federal government taxes.
- Transfer payments and purchases.
Goals of fiscal policy include:
- Achieving high employment.
- Maintaining low and stable inflation.
- Ensuring healthy economic growth.

Existing government policies that automatically adjust with the business cycle.
- Example: Taxes and transfer payments react without new legislation.

Actions taken by the government to modify spending, taxes, or transfer payments intentionally.

Involves:
- Increasing government purchases.
- Increasing transfer payments.
- Decreasing taxes to boost aggregate demand (AD).

Directly increases AD through government purchases (G).
Indirectly increases AD via disposable income adjustments through taxes and transfer payments.

To shift the AD curve further to the right than it would have occurred without intervention.
Appropriate in conditions of:
- Equilibrium below full employment (e.g., recession).

Aims to decrease aggregate demand growth to control inflation.
Used when the economy is operating above full employment, facing high inflation.

The concept that an increase in autonomous expenditure (e.g., government purchases) leads to a more than pro-rata increase in real GDP.
- As one person’s spending becomes another’s income, a chain reaction occurs.

Time Lags:
- Recognition lag: Time to identify an economic issue.
- Legislative lag: Time to pass legislation.
- Implementation lag: Time to enact policy.
- Impact lag: Time for policy effects to manifest.
- Total lag can be up to 18 months.
Crowding Out:
- Increased government spending leading to decreased private sector spending due to resource competition.
Uncertainty:
- Inaccuracies in estimating the multiplier effect.
- Potential rise in inflation from extensive government borrowing.

Embedded within government policies to stabilize the economy without needing new legislation.
Examples include:
- Marginal personal income tax rates.
- Transfer payments that automatically adjust with GDP changes.

Designed to foster long-term economic growth by:
- Enhancing labor, capital, resources, and entrepreneurship.
- Shifting long-run aggregate supply (potential GDP) to the right.