Discuss The Best Option For Australia And Will Justify The...

Introduction The use of both monetary and fiscal policies has been specifically aimed at reducing inflation and implementing policies for sustained economic growth. This paper will present a discussion on the definitions of each policy while examining their role in economy. Based on the obtained insights, the paper will discuss the best option for Australia and will justify the rationale. In the end, the discussion will be given a conclusive shape in which the key learning will be summarized and future context of policy implementations will be included. Definitions of Monetary Policy As a part of the economic policy, a monetary policy has specific goals and priorities for monetary stability (stability of the purchasing power of the†¦show more content†¦Monetary policy involves two fundamental decisions(Leeper, 2013): 1) The choice of the average inflation rate and a corresponding average rate of money growth in the medium term; and 2) The choice of how to deviate from this medium to reduce the fluctuations of production in the short-term(Leeper, 2013). Definitions of Fiscal Policy Many economists have been of the opinion that fiscal policy is not only ineffective, but can even be harmful in the long-run. Fiscal policy includes all of the interventions of a responsible economic policy concerning public spending and taxes that are made to influence the level of aggregate demand of the economy(Corsetti Mà ¼ller, 2012). An expansionary fiscal policy is aimed at raising the equilibrium level of income, while a restrictive fiscal policy is normally aimed at containing inflation caused by excess aggregate demand or to contain an excessive deficit of the state budget. Keynesian theory argues that the macroeconomic effects of fiscal policy depend crucially both on the way in which it is conducted (change in spending or tax variations), and the way the public sector’s borrowing requirements (excess spending on tax revenues) are financed(DavigLeeper, 2011). Given the fact that taxes and government expenditures take a prolonged time period for materialization, fis cal policy inculcates fiscal biases, and relatively long decisional lags. Figure 1: Impact of