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Comparing Fiscal and Monetary policies of the UK and Australia

Assessment Task : Notes

Students must use appropriate theories and policies to explain the implications. Monetary policy conduct must be explained with proper money market diagrams with MD-MS and interest rates and the impact of the money market on AD_AS models.

Fiscal policy implementation should discuss the government expenditure, government revenues and taxation issues and implications on consumption pattern, using consumption function such as 

Y –T = YD = C + S; 

C = f(YD) = autonomous expenditure + MPC x YD

Changes in the GDP components must be analysed separately by using AE component such as 

GDP = AE = Y = C + I + G + NX.

Globalisation must be analysed in terms of (a) reduction in trade barriers; (b) less costly access to G + S, factors of production and technology; (c) speedy information flow and retrieval.

Government regulations should be treated as an exogenous variable and growth models such as growth accounting approaches must be used to explain those policy issues.

Students must use GFC impact on various economies comparing emerging economies, market failures, economic meltdown and stagflation.

Resource utilization should be analysed using AE and AD+AS models to identify the impacts on the macro variable fluctuation. Comparing and contrasting two-speed economy model would be a definite advantage.

Purpose and Overview

This assignment is based on a specific economic policy issue and it needs to be completed individually. This will further test your knowledge and skills on various economic theories and application of appropriate theories in problem solving. This contemporary theoretical and analytical task will evaluate the potential impact on government and business.

Assessment task:

Select a current macroeconomic policy issue which affect the operation of government and businesses in the changing global economic phenomenon and paradigm shift (your lecture topics will help to identify various macroeconomic policy issues). 

Compare how Australia and one other country (select country from the list below) address the selected policy issue. Outlining your own criteria for assessing each country’s response, discuss which is the most effective and why. Utilise appropriate diagrams and theory to support your arguments. 

Countries for comparison: 

  • United      Kingdom 
  • United      States 
  • Sweden      
  • Japan
  • Germany.


Answer

Introduction

The development of country depends on the economic factor. Moreover, it helps in building up of major market with the proper growth of economic factor. In order to achieve a remarkable rise in the GDP rates helps in lowering the rates of unemployment among the people. The proper calculation of the economic report helps in getting the proper investors making estimation about the future economy. In this essay, a comparison of economy needs to be making in two different countries that is Australia and U.K. The proper calculation of budget in terms of fiscal and monetary policy helps in both country development. The monetary and fiscal are two components that are used by the government. Monetary policy is carried out to supply the money in the economy. Monetary policy are monitored by the central bank of Australia and U.K. Fiscal  policy helps in increasing  the flow of money with the help of economy and also increases the deposit income of customers. 


Fiscal policy is a time consuming process, as the money needs to find a way in the economy. Both the factors are very important in order to carry out the economy in the two countries of Australia and U.K. The proper carrying out of MD-MS diagram helps to know the proper money market and the AD_AS model helps in getting the development in the money market. The proper fiscal policy and monetary policy helps in calculating the expenditure of government. The GFC impact has also carried out to briefly state the financial crisis falls on Australia and U.K. Moreover, GDP is also implemented on properly analysis of aggregate expenditure. The aggregate expenditure, aggregate demand and aggregate supply are carried out to identify properly about the fluctuations in the macro variable. 

Body

Fiscal policy implementation between Australia and U.K

A centralised bank of these countries mainly depends on two diverse areas of interest. The first is the choice of interest rate target, and second is the choosing proper instrument for managing the company’s balance sheet. A remarkable stance taken by the Australian economy is the low interest rates despite being hit by inflation (Pratt, 2010)The Consumer Price Index (CPI) in Australia had a gradual increase in the recent years, however U.K did not achieve such a remarkable increase in the CPI. The identification of a good economy can be done through tools like low inflation rates, low increase in Interest rates and marginally high unemployment rate. Unemployment rate reduced drastically in the fourth half of 2009. There has been increasing GDP rates as well as low unemployment rates for the past few years which helped both the country to achieve a better stabilized economy (Hazledine, & Quiggin, 2006). Australia’s economic recovery period is marked from 2005 to 2009 in which the money market interest rate has declined significantly from 3.5% in 2005 to 3.1% in 2009. However, during the same period U.K economy was struck in a financial crisis. The Demand- consumption model in U.K is totally distorted. Monetary policy can be a temporary solution to U.K’s uncertain economy. U.K monetary and fiscal policy has changed U.K’s economic and trading regime.

Figure 1:  Marginal Demand Curve

(Source: Broadberry, S., & Irwin, D. A. 2007)


The marginal demand curve helps in calculate the export and import price on the basis of price of the product. This helps in building up of production in the imports of the products that is home demand and home supply. The marginal curve helps in increasing the gap between production and consumption of imports. 

Figure 2 : Foreign export in terms of price quantity

(Source: Barrett, A., & McCarthy, Y. 2008)


Figure 3: MD-MS Curve

(Source: Ricento, T. Ed.. 2009)


This MS-MD diagram helps in properly identifies the volume and the price of the trade in terms of the policy.

The AD- AS model helps in calculating the aggregate in the supply and demand. This helps to increase the total production and total demand. Moreover, this helps in increasing the supply of the demand and the supply of the product.  

IS-LM model for U.K and Australia


IS-LM  (Investment Saving-Liquidity Preference Money Supply). The investment/saving (IS) incorporate market demand, at the same time the liquidity refers to the raw cash available in the market for investment.

Figure 4: NATIONAL INCOME VS RATE OF INTEREST

(Source: Pratt, A. C. 2010) 

In the IS-LM model the national income with the increase in government expenditure, the equilibrium shifts from point E to B with rate of interest rising from r1 to rand income level from Yto Y2. Taking investment fixed and there is a tremendous decline in the government expenditure which led to the inclination of the graph towards left side. The government policy to increase the volume of money, cash liquidity will lower the rate of interest to further extent. The IS-LM curve model enables expansion of money supply increasing the demand for goods and services. 


Figure 5 : Effect of expension in money supply on interest rate and income

(Source: Hazledine, T., & Quiggin, J. 2006)

The effect shows that the greater availability of money will lead the government to impose strict policy on the liquidity bonds. The increase rate of money supply has declined the economy of both countries. The Central banks of the countries has increased the cash reserve ratio that the bank have to maintain good cash resulting in fall of cash flow in the banks leading the banks to urge for credits which in turn reduced the inflation rate in both these countries. The rise in interest rates is accompanied by simultaneous fall in income.


Comparing between the fiscal and monetary policy between Australia and U.K:

The Australian economy has experienced a huge growth and reduced the amount of un-employment between workers. The country is highly reached with the natural resources such as copper, iron, etc that helps in the export and import of the goods. The Australian economy has raised nearly 69% of the gross domestic product. The global financial crisis are unaffected by the banking system of Australia. Australia has ranked 10th among the revenue rising of $503.7 billion. 

U.K has ranked at 6th in the revenue which is 95% more than Australia. Revenue has shared up to approximately $ 985.10 billion. The gross domestic product has increased 8.2% more in Australia. It is the largest portion of GDP has declined at a several amount. At the time of economic crisis the central bank has coordinated with the interest rate. 


Fig :6  Australia VS U.K GDP

(Source: White, R., & Tadesse, B. 2007)




Properly discussing the expenditure on the implications of fiscal policy

The Australian economy gained continuous growth and low unemployment rate whereas U.K is the second largest trading and financial hub in Europe after Germany with agriculture being the most mechanized form of industry in Europe producing more than 50% of food needs with less than 2% workforce. In another context, the high rate of Australian dollar affected most of the manufacturing industry accounting for 70% GDP and 75% of jobs. Britain economy was hit by recession during 1992 however Australia was unaffected by global financial crisis due to the stronghold of banks in their economy. Australia has faced a drastic incline in trade and commerce with increase in the volume of imports resulting in rise in commodity prices in recent years. Australia has bilateral trade ties with many countries like Chile, Malaysia, New Zealand and the U.S and the restriction on trade barriers have further strengthened the issue. The government will continue persistent deflation with shrinking population as challenging aspect of the economy. The rate of the increase can be calculated by:

Y - T = YD = C + S

Y = National Income 

T = Tax

C = Consumption

S =Supply

YD = Disposable Income

National income is the net worth of all the goods and services produced in one year within the country. The National Income depends directly on consumption and supply, the goods are produced from raw materials converted by firms at one stage and sold to firm at next stage (White, 2007). Value added at each step thus yielding the product a retail selling price. U.K is heading up to a new fiscal year as the effect on consumers has taken a toll with the increase in value added tax receipts. The net borrowing of U.K was 10.4 billion pound in the year 2013 as compared to 9.3 billion pound in year 2014. The Consumption increased marginally with less supply in U.K leading to borrowing as compared to Australia where the supply and demand are almost equal. The Disposable Income in Australia achieved a high rate even after recession as compared to U.K due to low rate of interest.

Explaining properly about the GDP component in U.K and Australia

The properly analysis of Gross Domestic Product helps in increasing the Aggregate Expenditure (AG) in the country of Australia and U.K. The GDP is connected with the Average Expenditure (AE), National Income (Y), Consumption (C), Investment (I), Government expenditure and the net profit. The aggregate expenditure is the process of calculating the total sum in economy activity that is GDP (Antonelli, 2011). GDP (Gross Domestic Products) helps to properly measure the economic growth.  The excess supply of the expenditure helps in reducing the price of product which in terms decreases the GDP of economy. While there is an extra expenditure supply, there is an increase the price of product and also increase the rate of demand or GDP. A high rise of the Aggregate Expenditure helps to increase the equilibrium and also increased GDP. 


Figure 7:  GDP income of goods and services

(Source: Monacelli, T., & Perotti, R. 2010)


The above graph clearly states with the model of Aggregate Expenditure. This also helps to get the GDP, equilibrium (Carree,, Van Stel , Thurik, & Wennekers, 2007.). A proper shifting helps to make the proper impact on the GDP.

The GDP is calculated by the following calculations:-

GDP= Aggregate Expenditures = National Income= Consumption + Investment + Government Expenditure + Net Exports. 

Where,

C (Consumption) : It belongs to the consumption of households that is used for a long period of time. 

I (Investment): The investment completely depends on the cost or the capital required while buying of products.

G (Government Expenditure): Government expenditure completely depends on the spent money in the infrastructure. It includes with local, federal governments. It helps to increase the expenditure that is used in economy.

NX (Net Exports):  A net export belongs with total export minus with the import. 

In the Australian economy, of about 69% of Gross Development Products (GDP) helps in increasing the rate of job that is approximately 72%. This increase of economy helps in growing rate in technology. 

In the U.K, the Gross Development Products helps in increasing the amount of industry. Moreover, this GDP helps in developing the rate in the services that includes with banking, business service. The GDP also aims in reducing the budget planning for approximately at 9%. The GDP falls down at a lower amount and also reduces the budget. This debt helps to increase the amount in the society.  

 

Properly explaining about the impact of globalization in U.K and Australia 

Globalization has led the integration of different economies with removal of trade barriers enabling multilateral trade across the globe. Globalization is always accompanied by liberalization and privatization.UK firms got a comparative advantage in specialization of goods and services while there is a huge structural unemployment in both U.K and Australia as there is an inclination for the employment of workforce from the developing countries due to their low wages. The domestic and small scale economies in both the countries are worst hit because of an edge-cutting competition from the global contenders. Globalization caused a huge migration in U.K to fulfill the job vacancies in U.K causing a stress on UK housing and society (Perry, & McConney, 2007). The globalization has a damaging effect on these countries as these countries economy are affected by financial crisis in other countries. The obstacles and barriers to International trade is wiped out completely. WTO has been the lead key to globalization recognizes that Australia has generated a huge economy due to globalization by outsourcing in the tourism and business sector mainly. Globalization has a huge impact in increasing the investment in Multinational enterprises in Australia. Australia has been an active contender in globalization by enabling global trade and exchange of capital for a significant time. There are a number of companies that are investing in Australia conducting their business and generating employment, thus improving their economy. Australia is one of the major developed country thus withdrawing the corporations to expand their business to reach customer base of other developed countries.(Narayan,  2004.) It is the biggest driver of economization. The major problem in Australia is the rising inequality and better results are only possible if company take a step back from liberal capitalism.


Explaining properly about the policy issues in the regulation of Government

The government regulation helps in treating the exogenous variable and growth model. The proper growth of the accounting approach helps in carrying out the policy in terms of reduction of trade barriers, speedy information flow and the less cost effects in the G+S factors. 

The proper regulations help in carrying out the law and order by the Government. The proper regulation of trade barriers stops the export and import of the product. These trade barriers reducers the economic rate at a huge amount. The policy also includes with the less cost in the government expenditure adding with the savings. Factors also include with the production and technology in Australia and U.K. Moreover, this policy helps in the globalization factors carrying in both the country. The proper practice of Government regulations helps in increase the rate of economy (Broadberry, & Irwin,. 2007. ).  The economy factor can be increased by properly carrying out the policy in terms of trade barriers and speedy information flow.

In Australia, the proper working happens in the export and import trading for a long terms. Moreover, the country is highly rich in natural resources, hence a proper trading of export are highly required. Government of Australia has reduced the trade barriers at a huge amount for the high increase of economy. 

In the U.K, the Government has imposed trade barriers on the basis of import and export. Government has slowed down the global economic crisis. The country has focused  more with the services especially insurance , banking etc that increase huge portion of Gross Domestic Product (GDP). In the time of crisis in economy, U.K Government has imposed a high interest rate in the Central Bank. The Government has also increased the expenditure with the savings with the less cost of the product. 


Figure : 8 Australia Inflation rate

Source: Hazledine, T., & Quiggin, J. 2006

Figure : 9 U.K inflation rate

Source: Narayan, P. K. 2004

Figure 10: Change in currency value

Source: Hazledine, T., & Quiggin, J. 2006

GFC impact on comparing of various economies

Global Financial Crisis (GFC) has a huge impact in terms of varying economy in Australia and U.K. This GFC has an impact on the market failures, stagflation and economic meltdown.  GFC has raised the unemployment among the employee. Moreover the GFC has created a huge impact in the society as well in Australia and U.K.

There was a less financial crisis in the Australia due to the impact of GFC.  The GFC has reduced the personal wealthy and reduced the share price at a huge amount. Moreover, it also reduced daily spend of the customer and in return helps in saving. Australia suffered less as compared with the other country from the GFC (White & Tadesse, 2007). The banking system of Australia has remained in the strong position and inflation is in total control. Australia has even receive benefits from the trades in this coming years and also rising the price of the commodity at a global amount (Ricento . 2009.). Australia has many products that are exported in different areas. These products include with the energy, natural resources and foods. The country has an excess amount of resources that includes with coal, copper and most important the renewable energy resources.

In the U.K the global financial crisis has made a hit in the economy. The product price has declined at a considerable amount such as price of homes, debt on high customer. This global financial crisis has also slowed down the economy problem of Britain. This helps in reducing the economic decline in a larger scale. 



Process analyzing the resources with AE and AD+AS model

A proper utilization is required while proper analyzing of AE and AD+AS model. AE or Aggregate Expenditure model helps in properly measuring the expenditure of the final product that has a fixed price.  AE model helps the people for spending of money on the final finish product that depends on the income. AE model are based on the expenditures that includes with export and import. It can be calculated from the equation:-

AE=C+I+G+X-M

Where, C= total consumption expenditure

            I= investment expenditure

            G=government expenditure

            X=export expenditure

            M= import expenditure


In the AD+AS model, states with the Aggregate Supply (AS) of calculating the product and service on required price. Aggregate Demand (AD) is the minimum price of the product and service used at the time of purchase. 

There are basically four points required while calculating the Aggregate Demand (AD) that is consumption (C) , investment (I), government spending (G) and net exports (NX). The net exports are stated with exports - imports. While calculating the AD, input and output prices are highly required (Baker, Bloom, & Davis,. 2016.). 


Figure 11 : Aggregate expenditure model

(Source: Ricento, T. Ed.. 2009)

Properly contrasting and comparing two speed economy model

AE and AD model are the concepts based on macroeconomic that are based on the variants of national income. In the AE and AD speed economy model clearly states about the demand taking on investment, consumption, net factors income, government outlays belongs to the main component of economy. 

While the economy rate is in equilibrium with the investment, consumption helps to increase the total effective demand and hence the product and service are properly supply in economy. 

Aggregate Expenditure is addition of the spending in consumption, government purchase in terms of economy. The model focuses on the short running with the GDP (Gross Domestic Product), spending in consumption, planned investment keeping the constant of price. 

Aggregate Demand (AD) helps in making relation with planned aggregate and price of the product in economy. 

In the Aggregate Expenditure (AE) helps to increase the planned investment and the actual investment. It helps in making assumption on the fixed price of the product. While the fixed price is change then the level of investment, net exports also change giving up new aggregate expenditure and also equilibrium in the model of AE.


Conclusion

This is concluded that an economic factor helps in increasing growth of the country. In this essay, Australia and U.K are taken into consideration. Moreover, the economic growth helps in reducing the unemployment rate among the people. It also helps in lowering the amount of debts and also helps to build the proper financial system. U.K helps in the more trading on the basis of import and export. Moreover, the Government must focus on the proper growth of the economy that helps in the further growth of the society. Mostly all the countries properly focus on the economic growth. 

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