MACROECONOMIC Essay Example | Topics and Well Written Essays - 1000 words - 1

MACROECONOMIC - Essay Example Therefore, fiscal policy addresses matters relating to the government’s debts and expenditures. It provides an understanding about measures that a government takes to collect taxes and incur expenditures. Answer 2: Fiscal policy aims to affect the economy through changing spending and collection of the government’s revenue. It includes all measures that are involved to stimulate the economical activity (Vitek, 2012). The main objective is to stimulate the national income through aggregate demand (Vitek, 2012). There are three instruments of fiscal policy 1. Government revenue or taxation 2. Government expenditure or Government spending 3. Government debt and management or government deficit The main instrument of fiscal policy is taxation (Perry, et al., 2008). By increasing or decreasing the tax burden on the public, it can influence government revenue (Vitek, 2012). Increasing tax burden will increase the general prices that will result in reduction in cash flow in an economy. Contrary, decreasing tax will reduce the general prices resulting in an increase of cash flow. Y   The above diagram shows the effect of taxation on an economy. It shows the effect of increase (Da1) and decrease (Da2) of tax on an economy. When the tax is increased from Da2 to Da1 it results in lower equilibrium and vice versa. Government expenditure is another instrument of fiscal policy in order to encourage the economy to grow (Perry, et al., 2008). Government expenditure involves spending activities of the government in the country which promotes expansion of businesses and creation of job opportunities (Vitek, 2012). It mainly involves expansion of the governmental sectors like schools, infrastructure projects, industries, and hospitals etc. The above diagram shows two different autonomous investments. When AD1 is the investment, the national income is raised and when the autonomous investment is decreased to AD2 the equilibrium declines. Government deficit refers to spending more than the government’s revenues. Mainly, under-developed countries are deficit financed because the growth of the economy is poor (Perry, et al., 2008). This tool aids underdeveloped countries to improve their economic conditions and boost growth. Resources for deficit budget are met by borrowing referred to as deficit financing (Hansen, 2003). Answer 3: According to Australian national statistic, the Australian government decreased taxes which caused the government’s revenue to fall by five million dollars. Taxation relief was a substantial step by the Australian government to encourage growth in its economy. Decline of about two million tax revenue was due to ineffective tax collection from companies. According to the information, tax burden was increased for people having higher incomes. Taxation was levied on industries and large scale companies whereas small businesses had significant reliefs (Perry, et al., 2008). Moreover, heavy tax was imposed on the duty free cigarette which resulted in a major saving in the transfer payment that was being done for import of tobacco and cigarette. The Australian government seems to be more inclined towards reducing the taxation rate (Perry, et al., 2008). This tool of fiscal policy encouraged people to invest and spend. The decrease in the