Activity 8(a)

Activity 8a: Policy proposal to increase expenditure on universities

  1. An investment in education by the government, such as the purchase of new technology like the latest smartboards from Australian manufacturers, will provide an immediate boost to the economy. This is because the purchase of smart boards becomes part of G2 as a component of aggregate demand, which boosts the production of goods and services, creating income for Australian businesses and workers, which in turn stimulates further expenditure on goods and services.  However, in the long term, the investment will help to stimulate the economy on the supply side.  This is because the new technology will help to boost the quality of human capital (raising the quality of education), which in turn helps to increase productivity, reduced average costs of production over time, decrease prices and raise output.  [In other words, the AS curve shifts to the right, exerting downward pressure on prices which stimulates aggregate demand and real GDP.]


  1. This follows on from the discussion in question 1. Given that the investment will stimulate aggregate demand in the short term it necessarily creates upward pressure on prices. [This is equivalent to shifting the AD curve to the right to the extent that more Australian made goods and services form part of the investment demand.].  Inflation falls in the long term to the extent that the increased productivity helps to reduce production costs (AS shifting to the right) and prices.


  1. The $2 billion investment can be ‘funded’ in a number of ways. The government could increase taxes or introduce new taxes or alternatively reduce other types of government expenditure.  If neither of these options is chosen, then the budget outcome will move further into deficit (assuming the starting point was a deficit or a balanced budget) which then means that the government will need to finance the deficit by borrowing money from Australian or foreign businesses or households (or the RBA).  Alternatively, it could sell government assets to finance the larger deficit.


  1. Introducing new taxes (or raising taxes) will be politically unpopular and create costs on other economic agents (e.g. businesses who must bear the burden of any additional taxes). Similarly, reducing expenditure will be politically unpopular and also negatively impact on those members of society affected by the expenditure cuts. Borrowing money will, first, create a cost for the government in terms of the interest that needs to be repaid on the borrowings.  Second, the borrowing will add to the stockpile of government debt which can create a burden for taxpayers in the future.  Selling off assets to the private sector can be problematic to the extent that the private sector is less concerned about service provision and more concerned about profits.


  1. Investing $2 billion in education necessarily entails an opportunity cost because the $2 billion could be used in a variety of ways, such as spending to improve roads and railways, spending on health services and/or spending on national parks or defence. Whatever is the next best alternative use of the $2 billion becomes the opportunity cost.