Macroeconomic Effects of Fiscal Policy

This assignment delves into the complex relationship between fiscal policy and macroeconomic performance. Students are tasked with analyzing the impacts of government spending and taxation on key economic indicators such as GDP, inflation, and unemployment. The discussion draws upon established macroeconomic theories, including Keynesian economics, and examines the effectiveness of various fiscal policy tools in stimulating economic growth and stabilizing markets. Real-world examples and case studies are likely included to illustrate the practical applications of these concepts.

Running head: COMPARATIVE MACROECONOMIC ANALYSIS
COMPARATIVE MACROECONOMIC ANALYSIS
Name of Student:
Name of University:
Author Note:

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COMPARATIVE MACROECONOMIC ANALYSIS
EXECUTIVE SUMMARY
In the modern world, economic policies play pivotal role in the functioning of the economy
as a whole taking care of the all the national economic challenges. Securing equilibrium and
driving the equilibrium towards stability are something greatly depend on what and how the
macroeconomic policies are undertaken. Role of fiscal and monetary policies are the tools
implemented in achieving so. The report analyses and compares the economic performance
of USA and Australia based on the major economic indicators. The motive is to analyse if
and how the economic movement of the USA impacts Australian performance. It has been
found that Australia and USA are greater trade partners of each other. USA is being world
largest GDP holder, creates much of the impact on the countries associated with trade if any
downfall appears in the economy. Australia is one such small country being greatly impacted
by the USA not always directly but indirectly due to the impact of crises.

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COMPARATIVE MACROECONOMIC ANALYSIS
TABLE OF CONTENT
INTRODUCTION:....................................................................................................................3
DISCUSSION:...........................................................................................................................3
IMPORTANCE OF MACROECONOMIC POLICIES:.......................................................3
MACROECONOMUC POLICIES OF AUSTRALIA:.........................................................4
MACROECONOMUC POLICIES OF USA.........................................................................7
COMPARATIVE STUDY: AUSTRALIA & USA...................................................................9
CONCLUISON:.......................................................................................................................16
REFERENCE...........................................................................................................................17

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COMPARATIVE MACROECONOMIC ANALYSIS
INTRODUCTION:
Australia and USA are two significant economies of the world in modern days, former
already world’s largest economy in terms of nominal GDP and the latter owe sits importance
in the very fact that it is a small economy with huge untapped potential to grow. The
Australian economy consists of world’s one of the biggest mixed market economy possessing
the rank of second wealthiest nation in terms of wealth held per adult. The country is mostly
service sector driven that contributes 61% to GDP. These facts reveal how important these
national economies are to the world economy.
This report aims to present an analytical discussion of both the national economies’
performance over the years and what implication the individual national economic condition
has on each other.
The paper depicts the operating macroeconomic policies of these countries and their
analysis in meeting the economic issues the nations are suffering from. In order to critically
analyse whether USA is having a recessionary trend in its GDP and Australia an
expansionary one, a comparative study of various economic indicators like GDP growth rate,
interest rates, net export growth rate and annual exchange rate movement have been
conducted based on the data collected from various sources.
DISCUSSION:
IMPORTANCE OF MACROECONOMIC POLICIES:
Any country broadly consists of two types of market, goods market and money
market. The economic performance of the country depends on the simultaneous equilibrium
of both the markets. Whenever the economy is found not to be in equilibrium it implies the

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COMPARATIVE MACROECONOMIC ANALYSIS
country is has not arrived at its stability. To push the economic operation towards stability
that is to boost the national GDP consistent with full employment level, the government
undertakes macroeconomic policies. These policies are implemented through two sets of
channel: Fiscal &Monetary Policies.
While the monetary policy take care of the level of money supply in the economy
fiscal policies plays instrumental role to influence economic activity carried out by
government expenditure. The level of money supply is pivotal element to determine the rate
of interest and price level operating in the economy. Based on the economic situations,
government adopts expansionary or contractionary monetary policies by buying bonds and
assets or selling them respectively. More money supply implies low interest rate that boosts
investment and production that further boosts consumption. To influence overall economy the
fiscal policy plays important role that helps economy reach its full employment equilibrium if
it is away from it. Government expenditure in forms of initiation of any public project or
application or removal of tax are the important instruments of fiscal policies that impacts the
overall income and consumption level further.
MACROECONOMUC POLICIES OF AUSTRALIA:
Monetary:
Monetary policies are the principal tool that supports the aggregate demand of
Australia throughout years. The Reserve Bank of Australia is responsible for adopting
monetary policies that bring money market equilibrium which further contributes to the
national equilibrium. The broader function of monetary policy is to design interest rate
applicable in money market credits. The cash rate further impacts other interest rates which
reflects in the behaviours of the borrower and lender, investors influencing the economic
activity as a whole and price level issues leading to inflation.

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COMPARATIVE MACROECONOMIC ANALYSIS
The biggest motive behind adopting specific monetary policies is to maintain stable
price level in the economy with presence of full employment leading to economic prosperity
and general welfare of Australia. To materialise these objectives, the RBA follows an
inflation target that allows the consumer price inflation to lie between 2-3% over the medium
term of the economy. The underlying motivation behind such target is to check the money
supply level in the economy that not only keeps the inflation within control but also preserves
the value of money encouraging strong growth with sustainability over long term in the
economy.
The monetary policy reflects partially the success of fiscal policy being able to curb
the deficits arising from the expansionary fiscal policy to fight back the glob financial crisis
giving birth to larger public debt. The controlled inflation leads to higher rate of interest that
USA. Monetary stimulus has been consistent with the RBA’s medium-term inflation target
band of 2% to 3% (Figure 7), as inflation has been low, and interest rates are higher in
Australia than in the United States or the euro area (Figure 14). Unless downside risks
materialise, the current supportive stance of monetary policy remains appropriate at present,
particularly in the absence of inflationary pressures. However, a side effect is a risk that
accommodative policy may be increasingly distorting financial markets and, especially,
house prices (which have risen to very high levels). Eventually, rates will need to be
normalised, but the timing and pace will depend on developments in growth, employment,
inflation, and the housing market.
Fiscal:
Australia enjoys comparatively lower tax burden, public spending and public in the
recent times among other OECD countries.

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COMPARATIVE MACROECONOMIC ANALYSIS
The global financial crisis ruptured economic stability in Australia whuch came back to
normalcy only when the Australian government provided fiscal support to avoid recessionary
pressure on economic output. This has led to increasing fiscal deficit over time reaching 2.4%
of GDP in financial year 2015-16. Fiscal policy of Australia is ruled by broad target of
acheieving balanced budget or budget surplus in the federal budget. State governments have .
been able to manage only small balance as a result, they don’t impact the fiscal stance
substantially. The recent target of the government is adoption of operational goal that would
help the budget surplus reach 1% of GDP which is efficient enough to bring down the debt-
GDP ratio to a minimum level. The prediction suggests that 1% of the budget surplus in the
future years would cause the debt ratio to reach 25% of GDP by 20215-26 and further reach
to zero by 2040. The balanced budget of Australia has implication of longstanding preference
regarding achieving low debt burdens. The tax reform of recent time focuses more on the
reduced corporate tax combating the base erosion and shift of profit under corporate taxation.
The GST has been made applicable to online digital product purchase and low-value
imported goods by making legislation by the government. Economic and efficient public
spending creates a strong basis for public finance increasing the effectiveness of transfer
payment and welfare. Government of Australia spends more to incur additional investment
for public projects that have substantial long term returns conducting cost benefit analysis
prior,

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COMPARATIVE MACROECONOMIC ANALYSIS
MACROECONOMUC POLICIES OF USA
Macroeconomic policies of USA are of great importance as the country has been
home ground to biggest recessions and depression in the history of world economy. To
recover from the shackle of great depression occurring in 1930 and prevailing over longer
period of time the fiscal and monetary policies undertaken by subsequent policy maker and
government was crucial. As per the Keynes, the recession could be greatly fought with
boosted aggregate demand. He brought the solution tapped in demand side of the economy
which could bring the nation out of the halted production and activities. Expansionary fiscal
and monetary policies have been major instrument adopted by the nation. Increase in the
expenditure made by government and removing tax created opportunity for more production,
employment and increased income that further increased the consumption spending of the
economy. The idea was more the consumption greater is the production. Moreover increase
in the money supply as part of expansionary fiscal policy has been one of the important
measure adopted by the Federal Reserve. Increased money supply leads to fall in interest rate
that makes investment cheaper and encourages it more.
Over the time the expansionary monetary policy increased the public debt of the
country increasing. From the beginning of 1980s, the major focus of the policymakers has
been on reducing fiscal deficits predominantly. The country has been doing great in terms of
foreign trade. Moreover, technological advancement and resultant innovative products of
USA has bigger share in the world market. So growth stimulating policies were not as
important as the domestic condition of the economy in terms of growing deficit. It was
assumed that lower deficit would reduce the borrowings made by government ad this further
woud bring down the rate of interest. This makes investment and capital accessibility easier
and advantageous by the business entities. However, the country faced a budget surplus in
1998 that led to tax cut in the fiscal policies. Amidst the mess of great financial recession

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COMPARATIVE MACROECONOMIC ANALYSIS
stemming from falling of greater American financial companies, the government enforced
Emergency Economic Stabilization Act of 2008 which incorporated a buyback program of
the troubled or bad assets from these companies.
The expansionary fiscal policies targeted to bring growth in the income and
employment of the economy led to adoption of expansionary fiscal policy.
Increased level of money supply caused inflation to rise high. This led to
tightening of monetary policy by the early of 1980s that only reflected into sharp
recession appearing in 1981-1982. The inflation rate did fall down which enable
Fed to pursue expansionary policy again but presence of pretty high level of
interest rate actually increase the budget deficit and following deficit financing of
the government. By 1990s the deficits narrowed and almost disappeared with
reduced rate of interest rate.
It was growingly evident that fighting inflation with the presence of fiscal
policies fighting unemployment was much difficult. Inflation reduction required
tax hike or reduction in spending where as the fiscal policy aims at increasing the
level of spending and cut tax rate to boost production.

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COMPARATIVE MACROECONOMIC ANALYSIS
COMPARATIVE STUDY: AUSTRALIA & USA
In this section a comparative study of the major economic indicators of both the
countries have been conducted. The time period taken here ranges from 1985-2015. Almost
30 years data have been collected and analysed the trends in growth rate of GDP , net export,
changes in national interest rates and exchange rates over time. The implication behind such
longer time period taken into study is to detect the major structural changes, if any, in the
performance pattern of the indicators
GDP Growth Rate:
YEAR GDP GROWTH RATE OF
AUSTRALIA
GDP GROWTH RATE
OF USA
1985 2.498678 4.238738
1986 2.301393 3.511614
1987 1.357168 3.461748
1988 3.29588 4.203972
1989 3.887075 3.680524
1990 4.345642 1.91937
1991 3.441627 -0.07408
1992 2.093525 3.555396
1993 0.526809 2.745857
1994 2.402119 4.037643
1995 2.667984 2.718976
1996 2.398314 3.795881
1997 2.20502 4.487026
1998 3.559967 4.449911
1999 3.589988 4.6852
2000 3.368408 4.092176
2001 1.350516 0.975982
2002 1.655855 1.786128
2003 0.756157 2.806776
200 2.705743 3.785743
2005 2.140683 3.345216

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COMPARATIVE MACROECONOMIC ANALYSIS
2006 3.350831 2.666626
2007 3.62151 1.77857
2008 1.547264 -0.29162
2009 -3.79908 -2.77553
2010 1.928673 2.531921
2011 2.808 1.601455
2012 0.745756 2.224031
2013 0.124224 1.677332
2014 0.644845 2.370458
2015 0.963058 2.596148
2016 1.480731 1.615656
Figure 1: GDP Growth Rate
Source: (World Bank data)
YEAR
1986
1988
1990
1992
1994
1996
1998
2000
2002
200
2006
2008
2010
2012
2014
2016
-6
-4
-2
0
2
4
6 GDP GROWTH RATE(%)
GROWTH RATE OF AUSTRALIA
GROWTH RATE OF USA
Figure 2; GDP Growth Rate
Source: (Author)
From the data analysis, it is quite evident that the growth rate of GDP in USA is more
over the years as compared to Australia. This trend is predominant till 1998. After that
Australia also started performing well in terms of GDP growth rate beyond the US. This can
be due to Asian financial crisis taking place at that time influencing USA which has been
largest creditor country to the world having large investments in Japan as well. The crisis has
recessionary impact on the output of USA. Again great financial crisis occurring in 2008 led
to negative growth of GDP for both the nations revealing the fact that Australia faced greater
downfall. The reason behind such incident is the falling export demand faced by Australia.

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COMPARATIVE MACROECONOMIC ANALYSIS
SAustralia has been greater exporter to USA and carrying out a strong trade relation. The
crisis halted USA economic activity and this hampered the trade affecting economy of
Australia. In 2010 Australia surpasses the USA growth of GDP but then USA takes over till
the recent years where the gap is minimalistic between their GDP growth rates. the goof
health of US economy is always better for Australian economy due to the trade transaction
the country undertakes. However, recessions of US ca enormously hurt Australian economy
which is evident if we look at the 2008 data.

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COMPARATIVE MACROECONOMIC ANALYSIS
Official Cash Rate Vs Fed Rate:
Figure 3: OCR Rate Movement
Source: (RBA Website)
From 1990 to 1995, Australia faced a steep fall in the official cash rate due to the
expansionary monetary policy. 1995 to 2000,there has been bit fluctuation in the cash rate an
dafter that the trends has been very liner capturing the next downward fall in the 2008. This
fall in OCR was to deal with the recession stemming from great financial crisis. Post 2010 the
trend has been upward sloping smoothly and falling again linearly after 2013. This reflects
the changes in monetary policies over the years keeping parity with the national economic
need.
YEAR Cash Rate (%) Fed Rate ()
1985 7.449047 6.524948
1986 8.087802 6.189985
1987 7.492809 5.511425
1988 6.410574 5.617435
1989 6.588599 6.723888
1990 9.645437 6.084919

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COMPARATIVE MACROECONOMIC ANALYSIS
1991 10.06832 4.969413
1992 8.953759 3.883588
1993 8.464548 3.536594
1994 8.006736 4.905799
1995 8.101661 6.605716
1996 6.858298 6.329727
1997 5.870175 6.616914
1998 5.3429 7.190871
1999 6.206952 6.366418
2000 5.030644 6.80301
2001 2.035681 4.539319
2002 3.403482 3.092403
2003 3.391598 2.086831
200 3.648011 1.547721
2005 3.422373 2.878896
2006 2.425093 4.73962
2007 3.067561 5.248971
2008 4.1823 3.065749
2009 1.044141 2.471794
2010 6.206931 2.004173
2011 1.462691 1.161394
2012 4.820785 1.382482
2013 6.356251 1.609007
2014 4.447267 1.433975
2015 6.321014 2.160831
Figure 4; Interest Rate

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COMPARATIVE MACROECONOMIC ANALYSIS
Source: (World Bank Data)
YEAR
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
0
2
4
6
8
10
12
14
16
18 CASH RATE Vs FED RATE
USA
AUS
Figure 5: Cash Rate and Fed Rate
Source:(Author)
From the above graphical presentation it is clear that OCR is always lesser than the interest
rate operative in USA. The Fed rate shows greater fluctuation over the period of time depicts
steep fall the years 2000 and 2008 when crisis took place. To bring the economy out of the
depression it was required for the reserve banks to take expansionary monetary plicy and as a
result the interest rates fell down sharply. 2008-2010 both the nation expreinced rise in
interest rates which is sign of the tightened monetary policy undertaken to curb the deficit
resultant from the post crisis increased fiscal expenditure of the governments. Till 2015 the
two nation have been able to bridge the gap between rates though fed rate always being
higher than the cash rate

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COMPARATIVE MACROECONOMIC ANALYSIS
The yearly data of net export growth of Australia and USA is as follows
YEAR Australia’s Net
Export( %
growth)
USA's Net
Export( %
growth)
1985 15.43941 3.343245
1986 3.783617 7.689104
1987 10.02455 10.89079
1988 8.450813 16.20981
1989 1.037071 11.57315
1990 4.670708 8.821251
1991 11.25581 6.61432
1992 9.454979 6.929837
1993 7.41093 3.276625
1994 9.488354 8.84091
1995 4.413139 10.27749
1996 9.960366 8.182009
1997 10.88359 11.91316
1998 4.676667 2.336248
1999 1.920969 2.644657
2000 9.718095 8.565476
2001 8.299302 -5.84308
2002 -0.80477 -1.72445
2003 0.197674 1.764281
2004 1.211118 9.752357
2005 3.334978 6.253035
2006 2.550985 9.035676

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COMPARATIVE MACROECONOMIC ANALYSIS
2007 3.887847 9.266418
2008 3.552992 5.735664
2009 1.750545 -8.79379
2010 5.140019 11.89451
2011 0.928412 6.851153
2012 5.005658 3.417326
2013 5.358286 3.481326
2014 5.970876 4.269446
2015 6.682174 0.109618
Figure 6: Net Export Growth Rate
Source: (World Bank Data)
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-15
-10
-5
0
5
10
15
20
NET EXPORT GROWTH (%)
usa
aus
Figure 7: Net Export Growth Rate
Source: (Author)

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COMPARATIVE MACROECONOMIC ANALYSIS
The graphical analysis clearly depicts the that Australia has been enjoying greater rate
of net export growth over the years until early 1990s. The trend has been again predominant
after and onwards 2004 where the growth rate is remarkably high. The post financial crisis
period the net export growth rate for Australia has been negative due to the world
contractionary imact emanating from the crisis. The crisis affected all the trading partners of
Australia further hampering its export and growth over time.
Real Exchange Rate Movement:
The real exchange rate of Australian dollar per unit of US dollar has been fluctuating
smoothly over the given time period. Till 1995 the trend was upward reflecting depreciated
Aus$ compared to US$. Post 1995, there has been downward trend in the movement showing
again an upward trend post 2006. Downward trend implies appreciation of Aus $.
YEAR Official exchange rate
(LCU per US$, period
average)
1985 1.431895
1986 1.495974
1987 1.42818
1988 1.279908
1989 1.264597
1990 1.281057
1991 1.283756
1992 1.361648
1993 1.47056
1994 1.367751
1995 1.349033

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COMPARATIVE MACROECONOMIC ANALYSIS
1996 1.277863
1997 1.34738
1998 1.591828
1999 1.54995
2000 1.724827
2001 1.933443
2002 1.840563
2003 1.541914
200 1.359753
2005 1.309473
2006 1.327973
2007 1.195073
2008 1.192178
2009 1.282189
2010 1.090159
2011 0.969463
2012 0.965801
2013 1.035843
2014 1.109363
2015 1.33109
Figure 8: Exchange Rate
Source: (World Bank Data)

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COMPARATIVE MACROECONOMIC ANALYSIS
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
0
0.5
1
1.5
2
2.5
AUS Exchange Rate(Per US$)
AUS Exchange Rate(Per US$)
Figure 9: Real Exchange Rate (AUS$ Per US$)
Source: (Author)
The appreciation continued between 2002 to 2013 with a break at the time of global crisis.
The mining boom and the consequent rise in Australia’s drove that real appreciation
Post 2013, the deprecation of exchange rate took over. The cause behind appreciation has
been boom in the mining sector and increased terms of trade of Australia. The depreciation
favors the sectors like mining, manufacturing and transport, which have greater share in the
export and mining having larger share of import competition in terms of the increased export
earnings.
CONCLUISON:
The above analysis reveals the importance of the US economy on the Australian
economic performance based on few indicators like net export growth rate and real exchange

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COMPARATIVE MACROECONOMIC ANALYSIS
rate, GDP growth rate. The countries are linked through international trade and the effects of
the crises in US economy spills on the Australia as well as the entire world through this
linked channel. Crises of US not only halt its own production but also affect the other
countries who are dependent on its exports and imports. Analyzing the data even it has been
found how fluctuation in the US economy has caused instability in the Australia leading to
changes in the maroeconomic polices over time. It can be concluded from the analysis that
the assertion made by the policymakers are justified to some extent.

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COMPARATIVE MACROECONOMIC ANALYSIS
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