How can the Australian Government use the budget and fiscal policy to stabilise economic activity?
It can’t. For several reasons. John Maynard Keynes that governments could use a combination of fiscal and monetary policies to keep the economy at close to the full-employment level, http://en.wikipedia.org/wiki/Keynesian_e… but in practice, that hasn’t worked out. In addition to some of the theoretical criticisms as to why the theory shouldn’t work (outlined in the Wikipedia article), there is also the reality: governments like to stimulate the economy when times are bad, but they don’t like to turn off the stimulation when times are good, and when shocks are too big, they just don’t have the poser to do much about them. Let’s talk about the first reality first. William McChesney Martin was the 9th Chairman of the Board of Governors of the Federal Reserve. His most famous quote about his central banking philosophy was that the job of the Federal Reserve is “to take away the punch bowl just as the party gets
