Monetary policy is a powerful tool for manipulating the economy, its capacity is heightened by the floating exchange rate used in Australia since December 1983. Fiscal policy, the other major macroeconomic force is somewhat less effective in reaching the major goals of the government including stabilisation of economic growth, unemployment, the balance of payments and inflation. The policies are simply a myriad of tools used to prevent a long period of high unemployment, inflation and prices as well as low wages and growth.
             Critically discuss the proposition that under a floating exchange rate (e.g. $Aus/$US) monetary policy is a powerful instrument of macroeconomic policymaking whereas fiscal policy is a weak instrument for achieving domestic macroeconomic goals.
             When attempting to fulfil its macroeconomic goals, governments have the choice of two major policies to use or combine. Firstly, monetary policy uses the level of interest rates to influence the economy in the short to medium term. Its major goals are to stabilise demand and inflation in the medium term and inflationary expectations and to achieve the government's objectives of sustainable growth with underlying inflation of about 2-3%. Fiscal policy is based on the use of government budgeting to either stimulate or dampen the economy, it primarily focuses on correcting the balance of payments situation, whilst not as flexible and wide ranging as monetary policy, fiscal policy is effective if managing a current account deficit.
             Since December 1983, Australia has been operating with a variable or 'floating' exchange rate, that is, determined by the supply and demand of the currency on the international foreign exchange market. The floating rate can be used to hedge against poor performance of the economy in the future by businesses and by the government, it can also be used to influence the level of activity in the economy, especially when combined with ...