Weaknesses and strengths of Monetary and
Budgetary Policy
Monetary
Budgetary
Strength
Weakness
Independent decision
making: The RBA is
linked by the Federal
government but it operates
independently.
Quick response: The RBA
meets every month. Its
response can be immediate
Effective decision: The
decisions it makes have
had an effective impact on
our economy
Impact lag: it takes up to
18 months for the full
effect of a cash rate
movement
Focus: The Federal
government can hone into
certain areas and give
assistance
Automatic solution: When
people lose their jobs they
automatically receive
assistance through the
Budget. In a macro sense it
has a stabilising influence
on the economy.
Income Distribution: It is
only through fiscal policy
that the Government is
able to target the problem
via welfare and income tax
Flexibility: If there are
unforeseen circumstances
that arise a mini budget
can be produced
Bias: Political bias
Political ideology does
have some influence
Overall impact: It’s a
“blunt instrument” It has
an impact on Australians
Stimulating the economy:
It really finds it difficult to
stimulate the economy
Structure: To become law
the Budget needs to go
through a number of
parliamentary stages
Implementation lag: Fiscal
policy is only implemented
once a year
Competing objectives: The
government may focus on
one objective but put
another at risk. Eg focus
on unemployment by
borrowing money overseas
but stuff up external
stability.