1 MANAGING FINANCE Table of Contents Answer to Question 1......................................................................................................................2 Answer to Question 2......................................................................................................................4 Answer to Question 3......................................................................................................................4 Answer to Question 4......................................................................................................................5
2 MANAGING FINANCE Scenario analysis Answer to Question 1 Some fundamental challenges that Australian economy is currently facing include Public debt, closure of some automotive companies and housing affordability challenges. Public debt The public debt has a negative effect on the economic growth and prosperity. To control public debt, the government, need to expense more on interest costs out of its budget. Thus the public investment will reduce as a result. The reduced investment and lower confidence will slowdown productivity growth and wages of workers. The social mobility and economic opportunities also impacted negatively due to growing public debt. As the debt is significantly higher, it is difficult for the government to address crisis situation such as future emergencies, recessions, war, and unanticipated challenges. The below graph shows the trend in the movement of public debt of Australia Figure 1: Public debt of Australian Government
3 MANAGING FINANCE Closure of some automotive industries The effect of closure of the motor vehicle industry will be higher in regional centres and capital cities across Australia. As a result of closure to automotive industries, the reduction in national employment of around 200,000. The economic growth hampered due to major job loss of 100,000 in Victoria. The use of advanced technology in Australian automotive industries and skills of trained labour in respective industry will end with the closure of the automotive industries. The closure of motor vehicle industry will lead to closure of other inter-related plants andincreaseinunemployment.Therefore,changeinmanufacturingsectorimpactedthe economic growth significantly. Housing affordability challenges It is being difficult for the Australian population to afford proper housing, as the high priced housing creates challenges for the mass. Poor housing creates intergenerational inequality in urban areas. The housing affordability challenge create an inequality of income and living standard in the economy. It effects the overall well-being including educational attainment, mental and physical health, employment outcomes and social participation. The graphical representation of housing affordability ratio in Australia:
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4 MANAGING FINANCE Figure 2: Housing affordability crisis in Australia Answer to Question 2 The increasing unemployment rate is real reason of concern. The unemployment rate recorded at 5.1% in 2017 and further it hiked to 5.2% in 2018. As the unemployment rate is high people lose their job, which effects the income of individual, loss of productivity and consumer spending of the country. Thus the national income of the Australia affected due to increase in unemployment rate. Unemployment caused the reduction in tax revenue, loss of profits and hike in government spending. Answer to Question 3 a) The problem of current account deficit should be addressed as it may cause foreign investors to lose confidence on the economy which, lead to decrease in investment. Thus, the capital flight may have resulted in depreciation of currency value. The loss of ownership of
5 MANAGING FINANCE assets happened due to current account deficit. The persistent current account deficit is a clear indication of an unbalance economy as there exists difference between long term investment and short term consumption. b) The Australian government could have adjusted current account deficit by increasing capital inflow of the country. Bonds and stocks purchased by the foreign companies and substantialdirectinvestmentwill decreasethe current accountdeficit.The aid from the International Monetary Fund and World Bank can help the economy. This is a sustainable approach to control current account deficit as the capital inflow will boost economic growth by encouraging production and opportunities. Answer to Question 4 The Australian government can increase GDP by adjusting aggregate demand and aggregate supply of the country. The country need to lower cost of borrowing and hike investment and consumer spending to boost aggregate demand. The nominal wage of the Australiashouldbeaboveinflationratetoincreaseaggregatedemand.Technological advancement can help aggregate supply to increase. Government may include new management techniques and more flexible working practices to increase the productivity of the workers which, further push the aggregate supply. The government can take measures to improve education system and boost infrastructure of the country to strengthen GDP. It will produce more skilled labour and create employment generation. Hence, the increase in aggregate demand and aggregate supply will push the economic growth. Therefore, the new government’s plan of increase in GDP will be restored.