Instruments of Fiscal Policy - Essay Example

There are three main instruments of fiscal policy as discussed below. They are public debts, taxation, and public spending. The instruments can be sued by the concerned authorities to achieve the desired level of production, national income as well as consumption. The term aggregate demand refers to the total expenditure made by households, governments, and businesses on the goods and services that are produced domestically. It describes the behavior of the buyers in response to changes in policy implementations. If the level of inflation rises, the purchasing power of the consumers falls and therefore the aggregate demand curve is downward sloping (Auerbach, 2005, p. 3).

The increase in expenditure on the part of the government is likely to shift the aggregate demand curve to the right.

The increase in government spending means more money or disposable income in the hands of the consumers. The level of employment will take the upward rising curve and therefore it is natural that the aggregate demand curve will budge to the right as the overall level of demand within the economy will rise.

The increase in tax cuts is expected to have the same effect as the cut will stimulate investment spending and the level of demand existing in the economy will rise. Therefore the aggregate demand curve will budge to the right in this case as well.

The fiscal deficit of Australia reached the level of 44.7 billion dollars during the year 2012. The fiscal stance that the government adopted during the federal budget during that year was mostly emphasized upon reducing the government expenditure. There were announcements of several new taxes namely minerals resource rent tax and the carbon price. There were some additional to fund reconstruction after natural disasters.

Variations in outcomes can be witnessed among the different industries. The high commodity prices boosted the national income while the terms of trade reached a record level in that year. On the other hand, the conditions remained subdued in the fields of investments as well as in the arena of household spending (WACE Revision Centre, 2013, p. 12). The rate of unemployment has remained at the level of 5.25% although there was a slight improvement in the unemployment conditions in the middle periods of 2011. The expenditures made by the consumers have remained at a moderate level with no surprising trends. The ratio of net wealth to disposable income has fallen in recent years. The business investment rose sharply till the second half which drove capital imports into the country and the impact of the capital imports had significant effects on the current account balance of the country. The demand stimulus of the country contracted since the expenditure associated with the initial fiscal stimulus got completed. The deficit position of the country was forecasted to move from the experienced deficit of 2.5% of GDP in 2011 to a relatively smaller deficit. The forecasted value was revised upwards which is a reflection of weaker growth than the anticipated growth. The prices of assets took the downward sloping curve as well. The participation rate in the labor force fell in the later periods of that year. The unclear conditions in the market led some firms to constrain the hiring process (Reserve Bank of Australia, 2012). The growth in total hours worked outsmarted the growth in employment over the year which indicated that the firms were trying to meet the additional labor by increasing the number of man-hours.