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ECON110

TUTORIAL 9: Fiscal Policy

SUBMISSION SHEET

Learnin O!"ec#i$e 1: E%a&ine #'e !asics o( o$ern&en# !)*e# )sin

A)s#ralia as an e%a&+le

1. The following addresses the basics components of governments budgeta) Name the three largest sources of revenue for the Australian federal

government.1 What is the variable in the AD-A model that captures all thesesources of revenue! "1 mar#)

$ndividual income ta%& compan' and resource rent ta%& sales ta%.

b) Name the three largest sources of e%penditure for the Australian federalgovernment. What is the variable in the AD-A model that captures all theseareas of e%penditure! "1 mar#)

1ource( Australian udget *apers +,11/

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Welfare& health and ever'thing else

Learnin O!"ec#i$e ,: E%a&ine #'e rela#ions'i+ !e#-een !)*e# *e(ici#s an*

*e!#

1. 0alculate the governments debt for the following simplified pretend econom'.Assume this pretend econom' has no debt before 'ear 1 and that interestrepa'ments are included in the budget balance.

a) 0alculate the governments debt at the end of ear 2. "1 mar#)

.ear Ann)al B)*e#

Balance Co)n#ry A

ear 1 341,bear + -41,b

ear 2 -41/b41/b debt

b) *rovide the other information that is re5uired to assess the si6e of the debt forcountr' A. "1 mar#)

7D*

Learnin O!"ec#i$e /: Un*ers#an* #'a# !)*e#s are co&+ose* o( cyclical

s#r)c#)ral !)*e#s

1. udgets are composed of structural and c'clical components.

a) Assume an econom' is in recession. 8%plain the impact of the recession onthe c'clical component of the budget. This e%planation must include areference to the automatic stabili6ers. "+ mar#s)

During a recession& 'oull get a c'clical deficit. 7overnment spending goes up& ta%esgo down. This happens automaticall' "welfare pa'ments go up etc.) and should bringthe econom' bac# to normal.

b) 9se the AD-A diagram to illustrate the impact of the automatic stabili6ers on7D* in Australia during the 7:0. "+ mar#s)

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c) Assume an econom' is in a boom. 8%plain the impact of the boom on thec'clical component of the budget. This e%planation must include a referenceto the automatic stabili6ers. "+ mar#s)

During a boom& 'oull get a c'clical surplus. 7overnment spending goes down& ta%esgo up automaticall'.

d) 8%plain the ma;or determinants of the position of the structural budget.+"+mar#s)

7overnment spending and ta%es

Learnin O!"ec#i$e : Co&+are #'e !)*e# o)#co&es in A)s#ralia: #'e 2rea#

3e+ression $s4 2FC

1. The fiscal polic' responses of the Australian government to the 7reatDepression and the 7:0 were fundamentall' different.

a) $n Australia during the 7:0 the government increased spending. 8%plain theimpact on the different components of the budget from this polic'. "+ mar#s)

When government spending goes up& unemplo'ment benefits and social welfareincreases. This still gives people spending power and is allowing people to give bac#to the econom'.

2ro)+ Ac#i$i#y: T'e 2rea# 3e+ression in A)s#ralia

2 See the charts under Learning Objective 1

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The 7reat Depression in Australia began with a decrease in e%ports particularl' woolto the 9nited

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Learnin O!"ec#i$e 7: Use #'e A36AS &o*el #o ill)s#ra#e #'e i&+ac# o(

e%+ansionary an* con#rac#ionary (iscal +olicy

. The Australian econom' is alread' in recession. 9se the AD-A diagram toillustrate the impact on 7D* from the Australian governments cuts to spending

and increases in ta%es. "1 mar#)

/. Discuss the impact of this polic' on peoples 5ualit' of life. "1 mar#)