Answer to Question #115365 in Macroeconomics for nitish

Question

In January 2018, Australia had an unemployment
rate of 5.5%.
(h) Analyse how the Australian government might
reduce unemployment by using fiscal policy.

Answer 1

Fiscal policy is a term which refers to the ways the government adjusts its spending levels and tax rates in order to monitor and influence a nation's economy.There are two main types of fiscal policy namely;

1) Contractionary fiscal policy. 

2) Expansionary fiscal policy.

 Fiscal policy can increase employment levels by helping to increase aggregate demand (AD) and the rate of economic growth. The government will need to include expansionary fiscal policy which this involves reducing taxes and increasing government spending. Lower taxes increase disposable income and help to increase consumption, leading to higher aggregate demand (AD).

Increase in aggregate demand (AD) will result to an increase in Real GDP. If firms increases their production, there will be an increase in demand for workers and this will definitely lower the levels of unemployment in Australia. With higher aggregate demand and good economic growth, few firms will go bankrupt or even liquidation indicating that most people will be employed.

Keynes argues that in a recession, capital and labour are idle .The government should intervene in order increase demand which will result to increase in employment opportunities.                                                                                                         

  Unemployment will only be reduced if there is a gap in the level of output this is because if the government increases the aggregate demand when the firms have more workers this can result to inflation the government should be very careful when increasing the aggregate demand in an economy.

In a country like Australia it will require the government to borrow more for the expansionary fiscal policy to work.                                                                                                

 In the long run the aggregate demand may not increase since the government is borrowing from the private sector in the economy and will therefore have to spend less.                                                                                                                                   

   The graph below shows a high real growth domestic product as a result of increase in aggregate demand.