1. Discuss what is meant by Fiscal Policy. What are the inst

1. Discuss what is meant by Fiscal Policy. What are the instruments of fiscal policy?
2 With the aid of a diagram, show and explain how fiscal policy can be used to shift the aggregate demand. Evaluate the effectiveness of the policy used.
3. Access the 2008-09 Australian Government’s Budget papers and with the aid of statistics, explain the fiscal policy stance adopted.
4. What are the current inflationary pressures being experienced in the Australian economy. Evaluate the appropriateness of the government’s fiscal policy stance.

Q1.The increase compares to rises of 0.4% in June and a fall of 0.3% in May,meaning for the 12 months to the end of July the Inflation Gauge recorded an increase of 1.9%.This puts it just below the Reserve Bank of Australia's (RBA) target band for inflation of 2.0-3.0%.
The July gain was driven by higher prices for communications,which alone contributed 0.27 percentage points to the overall increase,utilities and other housing,while prices for fruit and vegetables,financial services and audio-visual and computing equipment fell in the month.
TD Securities senior strategist Annete Beacher suggests the gauge data hint there has been a bottoming in inflation momentum,though the strength this month was partly through some one-off increases that may unwind in coming months.This means it remains uncertain as to whether or not there are increased inflationary pressures emerging for the Australian economy,particularly as the gauge remains below the RBA's target band.
In Beacher's view,today's outcome means the RBA will almost certainly leave interest rates unchanged when it meets next week,with the cash rate likely to stay at the current 3.0% level for some time as the central bank assesses more data and looks through recent volatility.
Q2While the RBA is likely moving towards a more neutral tone with respect to the rate outlook,Beacher suggests the potential for further rate cuts should be retained in the event the current economic recovery doesn't prove to be self-sustaining,especially once the recent fiscal stimulus measures have flowed through the system.
Melbourne Institute professor Don Harding,co-creator of the gauge,notes inflation numbers have been very volatile since late last year and so he sees it taking a couple of months to determine whether today's data are a sign inflation pressures are again picking up or whether the data are just another example of increased volatility.
In terms of the price pressures Harding points out prices rose in 32 expenditure groups and fell in only 12,meaning a net balance of 20 expenditure groups recording higher prices for the month.Given the latest figures Harding is now not so sure the beginning of an unwinding of the sustained increase in inflationary pressures in the Australian economy of the last several years is at hand.
Q3The IMF officials present were asked if they wanted to add anything to the Ito and Santiprobhob presentations.By and large,they agreed with the accounts given,but sought to underline a few points.They stressed that the crisis was a mix of a traditional balance of payments crisis and a financial sector crisis.The former required a standard response,including fiscal contraction and a step devaluation.It was also pointed out that the IMF did not have access to key data in the early stages of the crisis.In particular,they did not know the magnitude of the forward dollar contracts,or the amount of liquidity support that had been provided by the FIDF (close to 100 percent of base money by July 1997).This information conditioned the policy response sought by the fund.The IMF's key objectives at the outset were to reduce the current account deficit and to stop the money flowing from the central bank through the FIDF.
At this point,discussion turned again to the issue of non-performing loans.One participant wanted to know what fraction of the non-performing loans was due to the crisis,and what fraction were already non-performing in the first half of 1997.Although no one was able to give a firm estimate,a participant quoted a JP Morgan study that put the fraction of non-performing loans at 25 percent of total loans at the beginning of the crisis.An IMF participant referred to the pre-crisis fund report from June 1997,which,he claimed,laid out the problems that were present.Another IMF official reported,however,that when he visited Thailand in March of 1997,the official figures on non-performing loans in the banking system put them at just 7 percent.This official continued by saying that the Thai's should could a lot of credit for how they have managed the crisis.
Meeting chair Martin Feldstein attempted to switch discussion to the issue of whether the IMF conditions too tight,leading to a damaging credit crunch.Takatoshi Ito responded first,saying that he believed the 1 percent initial fiscal surplus target was overly strict (especially given the tightening from the monetary side).He noted that the IMF's excuse that they did not foresee the drop in GDP was not convincing given that this drop partly a function of the fiscal stance.In defense,one of the IMF officials distinguished between doing the right thing ex ante (with the information that they had in July 1997) and the right thing ex post (what would have been the best policy with hindsight).Given that the situation looked like a conventional balance of payments crisis at the outset,he felt that their policy prescription was appropriate.One participant asked if there were not enough contractionary forces anyway--including the wealth effects of the exchange rate depreciation.Why was a further contraction through fiscal tightening necessary?Another IMF official admitted that their program was predicated on the assumption that capital would not flow out as much as it did and that the exchange rate would not fall
Q4The next topic that came up in discussion was the appropriateness of the government's fiscal stance.It was asked whether the abandonment of the 1 percent surplus target was a bow to reality--a belated recognition that this was unattainable.The answer given was that it was recognized that it would be counterproductive.There were also question about how tendentious was the debate between the government and the fund on the easing of the target.One of the IMF officials shared that there was general agreement on the appropriateness of fiscal easing.He observed that the Thai officials were at least as conservative as the fund on this issue.The officials were pressed on whether the fund changed its view on the appropriateness of the fiscal contraction.They admitted that they did.
The issue of financial sector restructuring also initiated some debate.An official from the US government asked if the conditions imposed by the government--notably the dilution of ownership--in return for injections of new capital were two severe.An IMF official observed that government recapitalization was meant to be a safety net,and not to drive the process.Someone else asked about the politics of bailouts.He wondered if fear of political opposition prevented bailouts that might be warranted on economic grounds.The answer offered was that the key political constraint is that shareholders are not to be bailed out.Another participant asked what was the incentive for putting equity into a bank with a large share of non-performing loans.The answer given was that the new money comes in on a preferred basis,so that the original owners are forced to take some pain.