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Flashcards in Economic Policies and Management Deck (44):

Benefits of EG

- increased standard of living for the population
- improved job prospects for the labour force
- opportunity for increased public investment in infrastructure and services such as education funded through higher government tax revenues


What is NAIRU

refers to the level of unemployment at which there is no cyclical unemployment


Benefits of maintaining full employment

- utilising an economy’s production capacity increasing standards of living and minimising adverse economic and social problems with unemployment


Consequences of high inflation

- reduce the value of income and wealth

- reduce international competitiveness through rising production costs

- cause a depreciation on the AUD

- create uncertainty in the future

- distort the pattern of resource allocation


AD formula

C + I + G + X - M


What is fiscal policy

influences resource allocation, redistributes income and reduces the fluctuations of the business cycle


3 ways to measure the budget outcome

1. Fiscal outcome – accurate long-term indicator recording revenue and expenses, not cash received

2. Underlying cash outcome – similar to fiscal outcome but uses cash method of accounting

3. Headline cash budget outcome – includes one off transactions (sale of gov. business)


Changes in budget outcomes

o Discretionary – deliberate changes influence structural component of budget outcome

o Non-discretionary – changes due to changes in economic activity
o Automatic stabilisers – counter cyclical
1. Transfer payments
2. Progressive taxation system


Stances of the budget changes

1. Expansionary stance: G > T increase in deficit
2. Contractionary stance: G < T decrease in deficit
3. Neutral


Effects of budgetary changes on resource use

o Direct through gov. spending in particular area of economy

o Indirect through taxation and spending decisions to influence decreased consumption


Effects of budgetary changes on income distribution

o Transfer payments

o Progressive taxation system


Effects of budgetary changes on savings

 Budget deficit decreases national savings – gov. forced to borrow from private sector


What is the crowding out effect

o With a depleted national savings pool, more competition for smaller savings pool leads to increased IR  more expensive to borrow funds domestically (CROWDING OUT EFFECT)
 Australia is an open economy – less effect compared to closed economy as private investors borrow from OS, increasing payments and primary income on CAD --> CAD deteriorates


Methods of financing a deficit

o Borrowing from overseas – minimises the crowding out effect and stimulating growth, this adds to foreign debt with interest repayments recorded as debits on the net primary income account of the BOP

o Borrowing form RBA (monetary financing) – in effect this amounts to the government printing money in order to finance its expenditures, increases the money supply and inflation

o Selling assets – does not reduce the level of such underlying cash deficit or net operating deficit because these are adjusted to reflect one-off transactions like asset sales


Impact of recent fiscal policy on EG

o Text book states that the stimulus package was the most successful ever, however, many suggest that it went too far and increased public debt (increased 2% to EG in 2009)


Impact of recent fiscal policy on unemployment and workforce participation

o Unemployment closely related to the impacts of economic growth

o Impacts upon cyclical unemployment

o Increase in the tax-free threshold in 2013/13 budget influenced workforce participation


Impact of recent fiscal policy on resource use

o Impact of the Carbon Tax as part of the Clean Energy Future Plan

o Renewable Energy Target aims to have 23% of power generated from renewable sources


Impact of recent fiscal policy on national savings and CAD

o Surpluses lead to public savings and deficits lead to public dissaving’s or borrowings

o Government’s focus is to move to budget surpluses over the medium term to reduce public debt

o Budget deficits tend to lead to a bigger CAD (TWIN DEFICITS HYPOTHESIS)


Impact of recent fiscal policy on distribution of income

o Reliance on automatic stabilisers to impact distribution of income

o NDIS introduced by Gillard

o Increase in superannuation from 9% to 12% by 2019


What is monetary policy

conducted by the RBA to influence the cost and availability of money and credit in the economy


What is tightening and loosening monetary policy

o Tightening – increase cash rate – contractionary

o Loosening – decrease cash rate – expansionary


Purpose of monetary policy

- Stability of the economy (inflation target 2-3%)

- minimising fluctuations in the value of AUD

- maintain full employment

- sustained level of economic growth (target 3-4%)


Impact of a decrease in interest rates on economic activity

o Encourages borrowing by both business and consumers

o Lower debt servicing costs increases disposable income and therefore spending

o Depreciation of the currency – less foreign investment due to lower returns

o Increase in aggregate demand

o Demand for money increases – RBA may increase money supply


What is microeconomic policies

government action to improve resource allocation between firms and industries, in order to maximise output from scarce resources (KEY – greater competition – less regulation – greater productivity)


What does micro policies encourage

encourages the efficient operations of product and factor markets through promoting structural change


Aim of microeconomic policies

Aim of the reform: allocative efficiency, technical efficiency, dynamic efficiency and innovation

o Long term aim of increasing sustainable growth in Australia – addressing possible constraints


Factors of constraint on micro

- lack of skilled workers

- inadequate infrastructure
- bottlenecks


Difference between factor and product markets

Factor market is for any input into the production process including land, labour, capital and enterprise.

Product market is the interaction of demand for and supply of the outputs of production, that is, goods and services.


Deregulation in the financial system

occurred 1980’s, floating of AUD, removal of direct control over banks, removal of foreign barriers entering the market and provided more competition


Impacts of micro reform (short term costs)

- job losses

- withdrawal of subsidies

- manufacturing closures


Impacts of micro reform (long term benefits)

o Achieve long term benefits of increased productivity growth from microeconomic reform

o Increase in economic output and lower unemployment

o Productivity commission stated that Australia’s GDP was 2.5% higher in 2006 due to the national competition policy reforms due to higher standards of living

o Lower inflation as a result of reforms – telecommunications dropped 50% since the 1990’s


National competition policy

established in 1995, regulate access to infrastructure, practices made illegal (monopolisation, price discrimination, exclusive dealing and collusion)


Future reforms: COAG

COAG have an agenda known as the seamless national economy and aims to harmonise rules and regulations between states. COAG improve productivity through regulatory reforms and competition with the aim to boost workforce participation through improvement in health and education policies (national health reform agenda 2011)


Market-based policies

involves incentives and disincentives to influence the behaviour of households and businesses, essentially internalising negative externalities (reducing supply)

o Negative externality – market price is too low and too much is being produced

o To internalise the negative externality a tax can be implemented to add the social cost as a direct cost of production – carbon tax


Target of environmental policies

long term policy targets to reduce carbon emissions 28% on 2005 level by 2030


CITIES (international trade in endangered species)

(1976) aim was to ensure international trade specimens of wild animals and plants does not threaten survival – 5,800 species of animals protected, and 30,000 plants protected


Vienna convention for the protection of the ozone layer

(1987) objective were for parties to promote cooperation by means of systematic observations, research and information exchange on the effects of human activities on the ozone layer and to adopt legislative or administrative measures against activities likely to have adverse effects on the ozone layer


Enterprise agreements

formerly called collective agreements are negotiated collectively between an employer and employee, usually performed by a union


Dispute resolution

occurs when employers or employees take action to disrupt the production process in order to highlight a disagreement between employers and employees (strikes, lockouts, work bans & closure)


Forms of dispute resolution

1. Conciliation – tribunal helps to reach a mutual agreement, decision is not legally binding

2. Arbitration (rarely used) – tribunal makes a ruling that resolves a dispute and its legally binding


When does the fair work commission intervene with dispute resolutions

1. Compulsory dispute settlement terms
o Fair work act requires that awards and enterprise agreements have a formal process of dispute resolution included as a term of the agreement
o In the case of a dispute, agreement may request for an independent third party to assist in resolution

2. Bargaining in good faith
o Negotiations must abide by; participating in all meetings, disclosing relevant information, giving genuine consideration to all proposals and refrain from conduct that would undermine collective bargaining

3. Resolving industrial action
o Industrial action permitted during negotiation
o Fair work act only intervenes when; threat of significant harm to the economy or the population or industrial action has been going on for a long period of time


Benefits of decentralised labour market

- high flexibility

- wages can change across firms and industries

- wages differ among individuals


Negative effects of decentralised labour market

- greater income inequality

- no safety net for low income earners


Education, training and employment programs

New education and training programs and reforms have been introduced during recent years with the goals of increasing productivity in the long term and increasing employment levels. Increase school retention rates to 90% by 2020 and raise the number of 25-34-year old with a university degree to 40% by 2025.