BB106 Principles of Economics Assignment-Melbourne Institute of Technology Australia

Instructions to students: This is not an individual assignment.

Weight: 20%

Marks: 100

Word Limit: 3000

Task: BB106 Principles of Economics Assignment

Assignment Description

Students are required to undertake research and conduct analytic work following given instructions in the areas of economics covered in learning materials from week 1 to week 10 inclusive. Through this assignment,students should identify the main macroeconomic issues during the global financial crisis (GFC) in Australia, and provide a theoretical assessment to the policy responses of the Australian policy-makers. Students are strongly advised to reference professional websites, journal articles and text books in this assignment.

Each group should consists of two students and will carry out economic analysis of the case of GFC in Australia.

The case of GFC in Australia:

In September 2008, Lehman Brothers, the fourth largest investment bank in the United States, collapsed leaving a huge debt. This triggered a global financial crisis that in turn had a massive negative effect on output in many countries. For example, car sales dropped by around 40% in the major economies, and world trade contracted by 25% on a quarter. What action was undertaken in Australia?

Fiscal policy

This had three main elements.

First, at the end of 2008 $10 billion was given in cash handouts to families who were receiving welfare payments and to pensioners. To the extent that these were spent, for a significant proportion were used to pay off debt or were saved, consumer spending and hence aggregate demand rose.

Second, in February 2009, a $42 billion increase in government capital expenditure was announced. Because there was clearly an inadequate number of major investment projects ‘ shovel ready’, about a quarter of the stimulus was allocated to schools by, put simply, building an extra library or gymnasium in most schools. This provided an immediate boost to the construction industry. Inevitably, given the speed with which the policy was implemented, there was some waste and duplication and the media had a field day highlighting this. The largest part of the $42 billion was spent on infrastructure – notably ports and transport. Because it takes considerable time to plan and design a new port, for example, this expenditure was spread over several years.

Third, In April 2009, each person who had paid tax in the previous financial year was sent a cheque for $900, at a total cost of $8 billion. This provided a further boost to consumer spending.

It was estimated that the total package amounted to 4.9% of GDP, making it, proportionally, one of the largest stimulus package in the world.

The effect on the budget balance was dramatic. In the first half of 2008 there was a budget surplus of $19 billion; in the first half of 2009 there was a budget deficit of $22 billion. The budget was forecasted  to remain in deficit for at least 6 years. The deficit will have to be met by borrowing and hence will be a crowding out effect.  Interest rates will be higher than would otherwise have been the case, which will have a negative effect on private sector expenditure, Fears were also expressed that the fiscal stimulus would continue even when the economy was approaching full employment again — illustrating the problem of timing effect of the fiscal policy.

Required: BB106 Principles of Economics Assignment-Melbourne Institute of Technology Australia

This assignment is to be completed in groups and is to be submitted in time.