Discuss the use of macroeconomic policy in achieve its economic objectives.

Macroeconomic policy through the use of fiscal and monetary influences aggregate
demand and stabilising fluctuations in the business cycle. Furthermore aims to achieve its
main economic objectives of economic growth, inflation and unemployment.
Fiscal policy involves the use of the Australian Governments Budget in order to achieve the
governments economic objectives such economic growth, inflation and unemployment. By
varying the amount of government spending and revenue, the government can alter the
level of economic activity, which in turn will influence economic growth, inflation,
unemployment. Further, changes in government spending and revenue collection can also
lead to a reallocation of resources, which changes the pattern of production in the
economy, as well as redistributing income within the community.
AD=C+I+G+X-M
Fiscal stance can either be expansionary, contractionary and neutral.
An expansionary stance is where the government plans to increase the level of economic
activity. Occurs through either a reduction in taxation revenue and/or an increase in
government expenditure, creating either a smaller surplus, or a larger deficit than the
previous year. This expansion leads to a multiplied increase in consumption and investment
and stimulates aggregate demand, which will increase the level of economic activity.
Contractionary stance, whereby government plans to decrease the level of economic
activity. Occurs through either an increase in taxation revenue and/or a decrease in
government expenditure, creating either a smaller deficit or a bigger surplus than in the
previous year. The contraction leads to a multiplied decrease in consumption and
investment, dampening aggregate demand, which will decrease economic activity.
Neutral stance, where the government plans to maintain the gap between revenue and
spending at around the same level as the previous year. A neutral fiscal policy should have
no effect on the overall level of economic activity.
Moreover the effects on the stance of fiscal policy influence discretionary and nondiscretionary changes. Discretionary changes are where deliberate changes to fiscal policy,
such as reduced spending or changing taxation rates (influence the structural component of
the budget outcome). Furthermore non-discretionary changes in fiscal policy are influenced
by factors other than planned changes to government revenue and expenditure (influence
the cyclical component of the budget outcome).
Economic growth
Fiscal stimulus in 2007 to boost consumer spending. Was very effective.
Inflation
Fiscal policy can also play a support role in maintaining low inflation. If the government
increases revenue and decreases spending, this reduces demand pressures in the economy
and can reduce demand-pull inflation. For example, the governments plan to achieve
budget balance by 2015-16 reflects a strategy of reducing inflationary pressure that might
otherwise emerge in an economy with over two decades of consecutive growth, and this
takes pressure off rising interest rates. In 2007 Fiscal policy setting that support the low
inflation objective may also reduce the need for higher interest rates to combat an
inflation challenge.
Unemployment

In recent years, successive government have sought to progressively increase the

effective tax-free threshold, in particular through the low-income earners Tax Offset
that was increased in the 2009-10 Budget and in the 2012-2013 Budget the tax-free
threshold was increase from $6000 to $18200.
Improving the skills of the Australian workforce was a priority of the 2011/12 budgets.
The Building Australias Future Workforce package in the budget aims to create more
labour opportunities for disadvantaged Australians and encourage a higher level of
workforce participation.
The national workforce development fund also creates an estimated 130,000 extra industryfocused, quality-training placement.
External growth

Monetary policy involves action by the Reserve Bank of Australia (RBA) to influence the
cost and availability of money and credit in the economy.
The Reserve Bank does not regulate the interest rates of domestic banks and financial
institutions directly, instead it influences the cash rate in the short term money market
through its domestic market operations. Since the cash rate is determined by forces of
supply and demand, the RBA can influence the cash rate by control the availability of funds
in Exchange Settlement (ES) accounts that banks hold at the RBA. The RBA can exercise
direct control over the supply of funds in ES accounts through DMO. As the RBA can buys
and sells second hand Commonwealth Government Securities (CGS) in the money
market in order to influence the level of borrowable fund available in the short term money
market.
If the RBA wants to adapt an expansionary stance it will buy back CGS from banks.
When the RBA buys securities from a bank, it adding funds to the banks ES account,
thus increasing the supply of borrowable funds, which inturn reduces the overnight
cash rate.
Similarly if the RBA wishes to adopt a contractionary stance it will sell CGS to the
banks. When the RBA sells securities to a bank, it withdraws funds from the bank's ES
account, thus decreasing the supply of borrowable funds, which inturn increases the
overnight cash rate.
As a result of changes in the cash rate, financial lending institutions make corresponding
changes in their interest rates.
Policy Fiscal Medium term (annual budget) Implementation time lags Short term (a few
months) Businesses and consumer will realise and carry forward changes gradually Impact
time lags. Monetary Short term (monthly RBA meetings)
RBA can change the cash rate overnight if they please Medium term (6-18 months)
Effects of the changes in interest rate may not be felt and adjusted upon straight away.
After it has achieved its initial goal of price stability, the RBA will aim to achieve economic
stability and full employment. The fluctuation of cost of borrowing, which affecting the
level of consumer and business borrowing, which hence will influence the level of aggregate
demand and supply. As the RBA can encourage or discourage borrowing by both business
and consumers, allowing it to control the level of consumption and business investment will
inturn will influences the level of economic activity thus allowing it to sustain its desire level
of economic growth, which is around 3-4%. Further its effectiveness can be seen through
the GFC, as Australia to be the only developed economy to resist a recession.

Inflation
The reserve bank has used pre-emptive monetary policy by taking action against
inflation before it emerges as a problem. For example the RBA increased interest rates
seven times between 2009 and 2010 to address concerns about inflation after the economy
emerged from the downturn caused by the global financial crisis.
Monetary policy has played the major role in Australias low inflation record since the
early 1990s. In the short to medium term, monetary policy is the major tool used to
reduce inflation and it attempts to sustain growth at a level that does create excessive
inflationary pressures.
Despite one-off effects it has generally maintained its objective on 2-3%

After it has achieved its initial goal of price stability, the RBA will aim to achieve economic
stability and full employment. The fluctuation of cost of borrowing, which affecting the
level of consumer and business borrowing, which hence will influence the level of aggregate
demand and supply. As the RBA can encourage or discourage borrowing by both business
and consumers, allowing it to control the level of consumption and business investment will
inturn will influences the level of economic activity thus allowing it to sustain its desire level
of economic growth, which is around 3-4%. Further its effectiveness can be seen through
the GFC, as Australia to be the only developed economy to resist a recession. Furthermore
an fluctuation in aggregate demand will lead to fluctuation in the supply of output; which if
increased will requires employment; or decreased will lead to higher prices and wages
creating unemployment. Thus through controlling the aggregate demand hence supply of
goods and services. The RBA can influence transmission mechanisms to achieve the natural
rate of unemployment although it recent years can be seen as ineffective as the current rate
is 6%, the highest since the GFC.
In achieving these its objectives there will also be conflicts as demonstrated thorough the
short run Phillips curve.

As it indicates that there will always be a trade off between inflation and unemployment. As
evident through the graph depending on the focus of governmentuac in order to achieve
one objective the other must be compromised as they are inversely related. Furthermore
monetary policy can also have a time lag of between 6-18 months as it take time for its

policy to pose significant affect on the economy hence placing restriction on its ability to
counter short-term policy needs.
Political constraints
The constraint of implementing unpopular policies is a major consideration for economic
management. This often effect governments ability to implement long term policies whose
benefits are only evident in the long. Another aspect of the political constraints on
government is the role of the Senate. Many economic reforms can only be implemented
through legislation.