Economics Assignment: Decision Making, Fiscal Policies, and Cash Rate

This economics assignment analyzes the importance of reducing carbon emissions, exploring the use of carbon taxes and Pigouvian taxes as solutions to negative externalities. It recommends fiscal policies to control inflation in Australia, emphasizing strategies like adjusting interest rates and managing government spending. The assignment also examines the effects of changes in the Australian Reserve Bank's cash rate on aggregate demand and supply, unemployment, the value of the Australian dollar, and the trade balance. The analysis provides insights into how economic decisions and policies influence various aspects of the Australian economy.

Decision Making

Question 3
a)
The focus towards reducing the carbon emission is high because it ultimately leads to lower fuel
consumption and save natural resources for the future generation. The reduction in carbon
emission is important for the achievement of sustainable goals framed by United Nations
Sustainable Goals. This is one of the best ways which also helps the companies of Australia to
save cost related to energy with the reduce carbon emission program. In economic, externality is
a cost or benefits of an economic activity that is experienced by the third party but it does not
form the part of a goods and services. In this situation, the carbon emission is an economic
activity which leads to the benefits of save energy, natural resources of the country that does not
form part of the goods and services Australia export outside country.
b)
Carbon Tax is basically a simple, effective and straightforward way in which the government of
Australia need to levy tax on the carbon emission required to produce the goods and services.
However, this is one of the toughest to enact as it would dissuade people from burning fossil
fuels by taxing them for the damage that specific carbon emission cause. This leads to negative
externalities. Basically, this is one of the best ways to address the pollution issues or climate
change.
 It is analysed that putting a price on carbon-based fuels in the form of fee or tax is one of
the best ways to reduce the GDG emission as well as the pollution level all over the
globe.
 Further, the tax on carbon fuels will increase the revenue of the government of Australia
which they further use to address the economic harm arises by burning fossil fuels.
 The Australian government should learn from the experience of South Africa and Canada
who have successfully implemented the carbon tax within their country to reduce the
pollution level.

c)
Yes, the government should impose Pigouvian tax that is tax on negative externalities until
the pollution level reach to Zero in order to save the country and reduce the pollution level. It is
because it reduces the environmental cost associated with excess carbon pollution. The tax on
negative externalities is intended to make consumer or producer to pay the full social cost of the
good. This reduces the consumption of the goods that have negative externality which ultimately
create a more socially efficient outcome.
Question 4
Fiscal Policies would be recommended to the Labour government of Australia to achieve the aim
of controlling high inflation rate. It is because fiscal policies main aim is to keep the inflation
rate of Australia to between 2 to 3 percent in support of the Reserve Bank goal of price stability
and full employment. The recommended fiscal policies would result into the controlling of
inflation rate in the following ways:
 In the monetary policy, the higher interest rate reduces the demand of the goods and
services in the Australian economy that ultimately leads to lower economic growth and

lower inflation. In this situation, the Labour government of Australia is need to increase
the interest rate of the Bank loans.
 However, the monetary policies individually incapable to control inflation so the
recommended fiscal policies to control inflation rate is increase in tax rates, increase in
savings, reducing in unnecessary expenditures, stop repayment of public debt for some
time, government should give up deficit financing rather than surplus budget via adopting
anti-inflationary budgetary policy with the aim controlling inflation rate.
Question 5
The likely effect of the change in the cash rate by the Australian Reserve Bank on the following
are as follows:
 Australian Aggregate demand: The effect of change in cash rate over the aggregate
demand is such that when exchange rates changes, the relative prices of export & import
also changes which leads to change in aggregate demand. The increase in cash rate of
Australia in the present case is leads to decrease in net export which reducing aggregate
demand.
 Aggregate Supply: Whenever the cash rate of Country changes, it leads to change in the
aggregate supply. In this case, the increase in cash rate leads to increase in aggregate
supply shifting the supply curve from left to right.
 Unemployment: The effect of change in cash rate over the unemployment rate is that
change in cash rate result into change in unemployment rate of country. The increase in
cash rate would result into high unemployment rate of Australia that leads to lower
employment within the country.
 The Value of Australian dollar: The increase in the cash rate would lead to a depreciation
in the exchange rate and decrease in the value of Australian dollar. The decrease in
demand for the country goods and services would leads to decrease demand for its
currency.
 Trade Balance: An increase in the exchange rate would result into the reduce balance of
trade. In this case, the exchange rate of Australia has depreciated due to increase in cash
rate which ultimately result into the decrease trade balance.

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