Leakages and injections within the economy have an impact on the fluctuation of the aggregate demand. Leakages leads to worsening of the aggregate demand, while the injections in improving the expansion of the total aggregate demand.
Aggregate demand usually defines the total spending on all goods and services including consumption, investment, government, and the net exports from deducting the total exports from the imports. An increase in each of the four elements has a significant effect on the overall aggregate demand.
For example, an increase in the total capital investment(I) leads to the expansion in the total aggregate demand. During economic difficulties, the aggregate demand is usually fluctuating due to the decline in the investment level and net exports in the economy.
When the aggregate demand is fluctuating, an input of either the leakages or injections will have an import on the aggregate demand. Two common leakages in an economy are savings and taxation while, the injections include government spending and investment.
The leakages lead to slowdown in the economic activities that worsens the overall aggregate demand level in the economy. Increased savings reduces the disposable income available for investment in businesses and creation more jobs.
In some countries, negative interest rates are applied discourage savings and encourage people to invest more in the economy. Taxation also leads to withdrawal of money in the economy and thus, leading to a significant decline in the aggregate demand level because of the slowing down of the economic activities.
When the government is seeking to reduce economic growth, increasing taxes is always an alternative.
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When the government is seeking to reduce economic growth, increasing taxes is always an alternative. Both the investment and government spending have positive impact on the aggregate demand as they inject more money and funding to the economic activities.
Investments provides capital resources and financial resources that can be invested in the economy to expand the overall economic activities and programs. Private investments are significant aspect of expanding the overall economic potential.
In Australia, the presence of successful private entities has helped in expanding the investments that is critical in recovering a fluctuating aggregate demand in the economy. Government spending is also important in triggering economic growth through providing financial resources by investing in the economy such as funding infrastructure development and growth.
Most importantly, the net exports also could lead to leakage or injection depending on its outcome. A negative net export result is a leakage in the economy that often leads to negative trading potential in the economy.
On the other hand, a positive net export position indicates an injection in the economy that is good in improving the aggregate demand. Injections and leakages in the Australian economy could affect the multiplier effect of the economy.
Multiplier effect is possible because of the injections of demand of good and services in the economy. Injections stimulates more spending in the economy and thus, leading to significant level of economic output and employment.
Significant injections will play a critical role in improving the aggregate demand of the economy as the multiplier effect is enhanced. On the other hand, the leakages in the economy have a worse effect on the multiplier effect.
Increase in the leakages reduces the potential expansion of the economic activities. Such a situation leads to the reduction in the real GDP. Multiplier effect that involves increased spending in the economy is only positive when the economy is experiencing additional injections.
Considering the current Australian potential, increased leakages will weaken the spending and thus, the multiplier effect of the economy. Question 2: Fiscal Policy Proposed fiscal policy changes in Australia has a significant impact on level of aggregate demand in the economy.
Making changes in the Australian government fiscal policy is important to shape the aggregate demand position. The government also focused on improving tax reforms to develop an overall tax policy that would support the behaviors to improve the growth of the businesses and persons taking part in the labour market.
In the short-term, the imposition of new taxes has a negative impact on the local economy as it creates internal shocks that leads to a decline in the economic activities. For example, an increase in the taxes would reduce the revenue potential of the businesses and limiting potential investments as more funds are spend on paying government taxes.
Reduction in taxes in the short-run period would also not increase in the aggregate demand as the government revenues from taxes decreases affecting the government spending in the economy.
Both fiscal policies are not effective in the short-run period.
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Both fiscal policies are not effective in the short-run period.
However, in the long-run, fiscal policies are able to stimulate economic growth and expansion of the aggregate demand as low taxes and increased government spending is able to increase the economic activities and available income for investments.
Thus, the adoption of the fiscal policies in Australia has helped the economy to recover from the downturn suffered from the global financial crisis. The Australian tax reform is focused on shaping the economic growth and improving the jobs dividends and the funding of the various government services.
The reform of taxes is relevant in promoting innovation, market competitiveness, and productivity that is part of job creation and expansion of wage rates. The changes in the tax system is relevant in promoting economic investment and innovation, and the creation of new jobs in the economy.
The focus of developing a tax system is relevant to adjust into a competitively digital world. Apart from tax, government spending is another element of the fiscal policy. Increased government spending would help in improving economic growth by growing the overall macroenvironment climate.
Following the decline in the mining business in Australia due to external financial crisis and shocks, the government has implemented for expanding government spending programs to encourage investment and enhanced customer confidence.
For example, the government has relied on the budgetary tool to enhance stronger economic growth and increased value by government spending. Such policy is important in increasing the overall living standards in the economy.
Both tax reform and increased government spending is critical in enhancing transparency and overall aggregate demand. Chart 1: Fiscal Policy Source: In the long-run, chart 2 shows that application of the expansionary contractionary and expansionary fiscal policy has different impact on the real GDP of the economy. The first chart shows an increase in the aggregate demand level from AD1 to AD2.
Expansionary fiscal policies that could lead to such an effect is the reduction in the taxes and increasing the government spending.
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Expansionary fiscal policies that could lead to such an effect is the reduction in the taxes and increasing the government spending. The combination of these two policy actions would trigger significant expansion in the aggregate demand level in the economy. In the second chart, the contractionary fiscal policy leads to the decline in the aggregate demand from AD1 to AD2 leading to the decline in the real GDP that represents the aggregate demand of the economy. Contractionary fiscal policies include increasing taxes and reduction in the government spending. These policy actions have an effect to reduce the total economic activities causing in a shrink in the overall economic growth potential. In the last few years, the Australian government has formulated comprehensive expansionary fiscal policy including tax reform and increased government expenditures to increase the overall real GDP through expanding the economic activities. The government is also work with international partners to grow the spending in the economy through private investments.
Question 3: Terms of Trade The terms of trade are evaluated through reviewing the export prices compared to the import prices. When the term of trade increases above 100 points, it is said to be improving. When it is below 100 points, the term of trade is usually not doing well. The current term of trade of Australia is 89.10 index points in 2018, which is an increase from 86.70 index points reported in the last quarter of 2017. The average term of trade from 11980 to 2018 is 64.83 index points. The highest index point was 106.40 points in 2011 and the lowest was reported in 47.50 in 1999.
In the last two years, the term of trade has been increasing significantly.
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In the last two years, the term of trade has been increasing significantly. In 2016, the term of trade was 70.16 index points and later increased to 89.10 in 2018. An increase in the term of trade shows that the trade performance of the Australian economy is good.
Over the last one year, the term of trade of Australian economy has been improving well indicating that the unit exports sold could purchase more import unit goods. The increase in the term of trade in the Australia market is beneficial through allowing the use of export goods to purchase more import goods. The situation is beneficial in managing the cost push inflation because the improvement depicts the falling import prices compared to the export prices. Nevertheless, nations might suffer because of the falling export volumes and declining balance of payments.
In the last 10 years, the terms of trade of Australia has improved significantly.
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In the last 10 years, the terms of trade of Australia has improved significantly. It is because the globalization process has had small impact on the export product prices compared the impact of the visible imports prices. However, the improving terms of trade could negatively impact on balance of trade when Australian and foreign consumers are elastic in nature responding to the changes in the exports and imports. Some of the key factors is affecting the international trading position of Australia includes the geographical location. The Australia has a good coast location that makes it possible to link sea transport from the different continents across the world. The climate of the country is also good making possible to attract business that helps in promoting economic growth and development. The access to coast makes it possible to enter into international multilateral and bilateral trade agreements.
The access to natural resource also impacts on the trading position of the economy.
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The access to natural resource also impacts on the trading position of the economy. Australia relies on its natural resources including coal, gold, and uranium to gain significant advantage in the international markets.
The level of economic growth and development also affects the international trading position of the economy. Australia is a developed economy, which gives them the advantage to trade favorably with other economies. Unlike developing economies, Australia has a strong foreign trade advantage. Other issues include political aspects that impacts on the trading position of the Australia economy in the international markets. Australia enjoys strong political stability due to its successful democratic governance process and systems. The nation had also suffered fewer international political conflicts making it a favorable economy for trading with the various global economies. The international trading position of the Australia economy has a significant impact on the economic growth rate of the economy. The economic growth rate of an economy is determined by its level of economic activities. When the total economic activities are high, it increases its overall economic growth rate. The improvement of the term of trade is able to spur economic growth as the domestic economy is able to expand through gaining significant advantage through trading with foreign countries. Through a strong trading position, the economy earns foreign earnings that grows its overall reserves. Therefore, an improving term of trade is significant in expanding the overall economic growth rate of the Australian economy.

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