ECON1010-Macroeconomics Report – Economics Assignment Help



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Writing material for your Policy Brief
Now that you have developed an understanding of the policy tools that are available to address economic challenges, your task is to prepare material that will go towards a Policy Brief on Australia’s recovery from the COVID-19 pandemic-induced recession and building an equitable and resilient economy in the future. Imagine you are now employed as a Graduate Economist working for the Australian Treasury. Your team is responsible for putting together a Policy Brief for the department that summarises some key aspects of the government’s policy responses to the COVID-19 recession and provides policy analysis to strengthen Australia’s economy in the future. You have a very important job! Your task is to provide clear answers to the following queries that have been requested from your department manager, using the knowledge and skills that you have gained from your macroeconomics course.

1) Fiscal policy and managing government budgets
The 2022-23 Federal Budget in Australia was announced on 29 March 2022. In the Budget, the Australian Government reported on the performance of the Australian economy and announced its fiscal policy measures to manage the Australian economy. The Budget reported that the Government is forecasting an economic growth rate of 4.5 per cent for a 2021-22 financial year. It noted that the unemployment had fallen to a low of 4.0 per cent, and is forecast to fall to 3.5 per cent in the September quarter of 2022. The Budget also noted that the Australian economy had been affected by global inflationary pressures. See excerpt from the Budget Statement below:

a) Your Policy Brief needsto provide some background information on the role of fiscal policy in the economy and to explain what is meant by the ‘fiscal multiplier effect’. One of your colleagues have drafted some content (see the two paragraphs below) but your task is to check this content for accuracy. In the following two paragraphs, identify any content that is inconsistent with the concepts that we have learnt in this course, and provide a fully corrected version.

There are three levers of fiscal policy: (1) government production of goods and services, (2) taxes, and (3) budgets. In relation to expansionary policy, the fiscal multiplier effect refers to the increase in overall GDP that results from an increase in an autonomous component of aggregate demand (such as government expenditure), minus the impact of the initial expenditure on the government’s budget. There is a risk that expansionary fiscal policy will crowd out some private investment, because government spending creates extra competition for limited inputs. Expansionary fiscal policy puts pressure on the economy’s price level, leading to rise in interest rates which can discourage investment and also net exports. However, crowding out is only likely to be a concern when the economy is in a deep contraction phase of the business cycle and operating far below productive capacity.

b) The Australian Bureau of Statistics (ABS) reports that the housing saving ratio in Australia increased notably during the pandemic. The following chart and table from the ABS illustrate how the fraction of income saved by households jumped during the pandemic. Despite falling in recent months, the household saving ratio remains above the prepandemic ratio. (See ABS chart and table below) Your team of economists are discussing whether an increase in the saving ratio would strengthen, or weaken, or have no effect on the size of the fiscal multiplier? Explain your response to this question, and the explanation why.

c) Your next task for the Policy Brief is to calculate the numerical value of the fiscal multiplier in current economic conditions.
You have information indicating that Australians spend about 16% of their household income on imports, and pay an average rate of 24% of their income on taxes. To figure out the other information that you will need to calculate the value of the multiplier, you should use the ABS data from the previous question on the household saving ratio. You should use the saving ratio data for the most recent quarter available in the table of the ABS data. When you compute your calculation, your manager has asked you to provide the formula for the fiscal multiplier and provide the fullsteps of your working, to show how you arrived at your answer. Round off your final answer to 2 decimal points. When you present your answer, write a clear sentence explaining how to interpret this final number.

d) In the Budget documents, the Australian Treasurer Josh Frydenberg announced that the Australian Government had injected $314 billion in economic support to assist the Australian economy to recover from the impacts of the pandemic. (See Treasurer’s Statement below) Now that you have computed the value of the multiplier, calculate your forecast of the overall impact of the government’s $314 billion stimulus package once the full effects have circulated throughout the economy. We can treat this stimulus package as an increase in government spending. You can use the value of multiplier rounded off to 2 decimal places, and present your final answer also rounded off to 2 decimal places. Be sure to show all your working because this will be needed in the Policy Brief. When you present your answer, write a clear sentence explaining how to interpret this final number.

e) Partly as a result of the economic support that the Australian Government provided during the pandemic, the Australian Government has estimated that it will run a budget deficit of $78 billion in 2022-23 (measured by the underlying cash balance). The Budget reports that in 2022-23 the Australian Government will have accumulated a net debt of $714.9 billion, which is equivalent to 31.1% of GDP. Net debt isforecast to peak at $864.7 billion by 2025- 26. (Source: Australian Treasury, Budget 2022-23, Budget Paper Number 1) Your team of economists is anticipating there is going to be concern among the general public and business community about the increasing size of the government debt. This concern needs to be addressed in the Policy Brief. In your contribution to the Policy Brief, you have been asked to write a simple explanation of what is meant by a ‘budget deficit’. Explain in what circumstances would a government’s fiscal position being in deficit, and in what circumstances would it be running a budgetsurplus? You should make reference to the formula forthe government’s budget balance that we learnt in class. 

f) Using your economic knowledge, give your expertise on whether Australians should be worried about running a large budget deficit and accumulating a large debt as a result of the government’s economic response to the pandemic? Provide reasons to support you answer why or why not. 

g) Your Policy Brief needs to consider the impacts of the pandemic on economic inequality. To analyse this issue, your team will be gathering data to calculate changes in the Gini Index (or Gini Coefficient) for Australia. There are concerns among policymakers that, without policy intervention, the pandemic would lead to a worsening of income inequality.

Your colleague has drafted the following paragraphs which attempt to explain the Gini Index.
Check the content of the following paragraphs accuracy. The content refers to some of the economic evidence that we have examined in our classesin relation to what happened to the Gini Index in the years following previous pandemics and epidemics. Provide your corrected version. During the first few months of the pandemic, there were concerns among policymakers that the COVID-19 pandemic would have the effect of worsening income inequality. A worsening of income inequality would be indicated by a decline in the value Gini Index. Previous studies investigating the effect of past pandemics have shown that Gini Index has increased following pandemics or epidemics, with this change lasting for up for at least 4 to 5 after the event. The Gini Index isrelated to the Lorenz Curve. 

If inequality gets worse, this would be visually illustrated by the Lorenz Curve moving closer towards the 45 degree line of perfect inequality.
If the government had concerns about income inequality worsening during the pandemic, this would provide a case for the government to scale back itstransfer payments and allow automatic stabilisers to take effect.

h) Your team have gained access to an economic study by researchers at the University of Canberra which analysed what happened to the Gini Index in Australia throughout the first few months of the pandemic. The abstract of their research paper, which was published in the Social Indicators Research academic journal in 2021, is provided below. What did the research discover had happened to the value of the Gini Index in Australia during the first few months of the pandemic in 2020? What do they attribute this outcome to, and what are the implications of their findings for policymakers who are responsible for designing economic support policies? 

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