AUSTRALIAN'S ECONOMY

Effectiveness of Australia's Fiscal & Monetary Policy

Effectiveness of Australians Fiscal & Monetary Policy

Introduction

Collapse of an established and leading bank Lehman brother in 2008 created a panic condition or wave of uncertainty in the global financial markets. Leading banks stopped borrowing from each other. Risk premium (cost of bearing particular risk) associated with interbank borrowing and lending increased by 5% from 0%. Later this risk premium reached a level of 6% (highest in the history). Corporate sector and individuals stopped borrowing from banks. Major CAPEX projects and huge investments were shelved. It was hard or became nearly impossible to get credit trade. They named it global financial crises, and the world has faced the biggest and the sharpest decline in the economic activity of this century (Shekhar 2009, pp.108). OECD (Organization for Economic Cooperation and Development) predicted that the world's overall trade could shrink by thirteen percent in 2009 as compared to 2008 (Perotti 2004, Pp.276)

Different governments respond this situation differently; some countries introduced easing monetary and fiscal policies that in turn causes slowdown of overall financial activities. Unemployment was increased sharply due to slow down of economic activity. Main objective of this assignment is to unfold the effectiveness of monetary and fiscal policy in addressing the economic and financial related issues.

Policies related to the macroeconomic environment of a country play a very critical role in the development of a country, and it assists its policy maker in the accomplishment of a stable and sustainable economy. Economic policies are mainly classified into two categories. Fiscal and Monetary policies, Fiscal side policies are aimed at regulating aggregate demand in the economy while monetary side policies focus on the stabilization of prices in an economy. With Government's controls and influence economic outcomes with the help of fiscal and monetary policies. Interaction of these two policies generates contradictory impact. In this assignment, we are going to discuss the repercussions. Prior to and before the governmental election campaign of 2010, it was frequently discussed and communicated by the Australians that due to governmental effective and timely decisions, citizens were spared from the dangerous repercussions of global financial crises. Governmental decision regarding monetary policies and fiscal stimulus are the two steps that the government was using in their federal election campaign.

Fiscal policies provide controls over revenue collection (taxation) and government spending in order to keep a check and balance on the aggregate demand in an economy. Monetary policy is aimed at controlling price stability with the help of interest rate and money supply. Role of fiscal and monetary policy is very clear in protecting many economies from the economic chaos took place due to GFC (Global Financial Crises) of 2007-2008 (Frankel, 2010). As for Australia's case is concern, government utilized a fiscal package of 42billions Australian dollars in 2008 to prevent the country from the threat of a potential recession.

Discussion

Role of Fiscal and Monetary Policies

The government of “Rudd” took critical steps in order to face the economical imbalances ...