# Computation of Multiplier: 1314472

Objective

The assignment has been written with an intention to answer three questions.

Question 1

 Sl No Particulars Amount 1 C 40+ 0.8*(Y-T) 2 IP 80 3 G 140 4 M 0 5 X 0 6 T 170 7 t 0

Ans a

Computation of Multiplier is as under:

 Multiplier = Y/G

Value of Multiplier = 620/140= 4.4

Ans b

Short run equilibrium output is equal to

 GDP = C+I+G+(X-M) Y = 40+0.8Y-170*.8+80+140+0 0.2Y = 124 Y = 620

Ans c

 Sl No Particulars Amount 1 C 40+ 0.8*(Y-T) 2 IP 80 3 G 140 4 M 0 5 X 40 6 T 170 7 t 0 GDP = C+I+G+(X-M) Y = 40+0.8Y-170*.8+80+140+40 0.2Y = 164 Y = 820 Increases by 200

Ans d

 Sl No Particulars Amount 1 C 40+ 0.8*(Y-T) 2 IP 80 3 G 140 4 M 0 5 X -40 6 T 170 7 t 0 GDP = C+I+G+(X-M) Y = 40+0.8Y-170*.8+80+140-40 0.2Y = 84 Y = 420 decreases by 200

Ans e

The tendency of recession and expansion to spread across country is very strong as change in export and import has a very strong impact on the Gross Domestic Product of the countries. A change of 40 has impact of 200 on GDP implying the impact of Net export or import can change GDP by 5 times. Thus, the economic recession in other country shall reduce export of the first country and shall cause GDP to slow down and vice versa. Thus, all economies are interlinked and recession and expansion in one economy and can impact the other economy very strongly.

Ans f

 Marginal Propensity for Import 0.1 Income Tax Rate 0.3 Exogenous Tax 30% C 40+ 0.8*(Y-T) IP 80 G 140 T 0.3Y Y 0.1Y GDP = C+I+G+(X-M) Y = 40+0.8Y-0.24Y+80+140-0.1Y .54Y = 260 Y = 481.4814815 Multiplier = 3.44

Question 2

Part 1

The graph shows mixed results of Australian Government revenue. Many years the government has seen a positive budget and many years there has been budget deficit. In this regard, many economists believe that positive budget symbolise good economic management and viceversa. The good economic management is an outcome of responsible discretionary fiscal policy.

Before commenting on the above, one needs to understand the meaning of discretionary fiscal policy which refers policy in relation to taxation and expenditure of the government. Further, budget surplus or deficit is computed as difference between income and expenditure of the government. A strong management of discretionary fiscal policy is required and government uses this tool to manage the economy. For instance, if there is a slow down in the economy, government spends more than the income so as to revive the economy, the said action of the government is a smart move and may be categorised as good economic management even though the budget has deficit in that year.

Let us also consider the example of current situation i.e. Covid 19 wherein government has released so many stimulus packages which shall entail its expenditure to increase income, the said move is a good economic management. Thus, surplus and deficits in budget are outcome of good economic management of the government and they by themselves donâ€™t symbolise good economic management. However, each government should restrict its deficit to certain % of GDP as deficits in GDP are covered through loan and loan has to be serviced through future revenue and any waste spending on the part of the government may result in government entering into s vicious circle of loan. Thus, a smart management of budget is necessary and deficit shall be management. However, a surplus or deficit in budget is not a 100% representative of good economic management as government can maintain surplus by doing nothing also.

Part 2

The recent Covid-19 situation has brought the Australian Economy to its halt and the global economy is expected to enter into a recessionary phase. To overcome the above situation, the Government of Australia has announced a lot of fiscal stimulus measures to keep the engine of the economy working. The government in the current situation has to lax tax also as it cannot impose or increase tax rate in current situation which caps its revenue. Further, the government is also required to spend highly so as to protect the economy from entering into recession and keep the liquidity flow in the country on account of lock down. Thus, the budget restrain of revenue has to be resolved.

The government in order to cover its deficit has the following possible measures like borrowing from the public, World Bank, issuance of bond and securities, disinvesting securities, printing new notes to enhance liquidity etc.