Following its budget in May of this year, the Commonwealth government and Reserve Bank of Australia has asked you for advice on whether they should change their mix of macroeconomic policies and if so, how. You are not supposed to take into account political or ideological considerations, instead you are requested to consider only macroeconomic issues. Macroeconomic policies are taken to include monetary, fiscal, wages and exchange rate policies. When discussing fiscal policy, stick to aggregates such as total transfer payments, aggregate taxes or aggregate government spending. Don’t focus on details such as the composition of government spending.
Students who are more familiar with the macroeconomic situation existing in a country other than Australia can choose to instead advise the government of that other country on its macroeconomic policies.
The project consists of three sections:
1] The first section should include an analysis of the current state of the economy. This analysis should be presented in terms of a theoretical framework used in the course. Analysing the current state of the economy and choosing the most appropriate (realistic) model of aggregate demand and combine it with the most appropriate (realistic) model of aggregate supply. This requires a subjective exercise of your judgement so it is important that your views are well argued. Note that it is not necessary that your views be the same as “mainstream” commentators, only that they be well argued. However, the emphasis both in this section, and on the whole project, is on the theoretical framework so don’t let your answer get bogged down in statistics.
Possible sources of information on the Australian economy might include official sources, economic summaries and quality newspapers.
Official sources include Budget Statement number 2, the Reserve Bank Bulletin, the Treasury round up, the OECD Economic Outlook (usually a lagged view of the Commonwealth Treasury). Newspapers that might prove useful include the Financial Review, the Australian, the Conversation and the Sydney Morning Herald. This section of the project should be roughly 500 words long.
2] The second section includes choosing the most appropriate economic targets for Australia (or your country of choice) and proposing a mix of fiscal and monetary policies. Note that in relation to fiscal policy this is a theoretical analysis of aggregate spending and tax. Be sure to justify both your choice of targets and include a careful and thorough theoretical analysis, including diagrams of how your proposed policies should meet these targets. Be careful to explain the assumptions that you have to make in order for your targets to be achieved. Again, your proposed policies do not have to be those that are currently fashionable.
The second part of the project should be roughly 1000 words long.
3] The third section ( titled a risk analysis ) involves a careful theoretical analysis including diagrams (these diagrams don’t need to be drawn using a computer) of the possible consequences of your recommended policies if the assumptions you made are wrong. In other words, what if different models of aggregate demand and aggregate supply were the correct ones? In your opinion, how likely is it that each of these possible outcomes would occur. In the light of these risks, would you still recommend the mix of policies you proposed in the second section of this project.
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