Part 5

Assume an economy is in recession and the government is considering using fiscal stimulus measures to boost spending, production and employment.

a) Using the IS-LM curve diagram,illustrate the crowding out problem that could occur as a result of increased government spending. Make sure to clearly indicate the new equilibrium position including showing how both the interest rate and level of Y change.

b)Explain how'crowding out' can harmproductivity growth.

c)Explain how the 'crowding out' problem associated with increased government spending can be avoided. In your answer identify any additional policy that is needed.

Part 6

The recent Federal Budget featured significant tax cuts to help stimulate the Australian economy which is currently in recession. Shortly after the announcing the budget, Treasurer Josh Frydenberg announced: "These tax cuts will put more money into people's pockets and that money will be spent across the economy and that money will help create jobs."

With reference to what you have learned about fiscal policy as part of this course, and in light of the current economic situation in Australia discuss the logic behind the Treasures statement. In your answer identify whether or not, or to what extent you agree with the Treasurer and explain why. In your answer draw on relevant evidence and examples as necessary to support your answer.