Economic Policy Objectives Flashcards
(47 cards)
What are the four major economic roles of the government?
- Provision of goods and services.
- Provision of welfare services.
- Regulation of business enterprises.
- Macroeconomic management.
What was the objective of the 1945 ‘White Paper’?
“Stimulate spending on goods and services to the extent necessary to maintain full employment.”
What are the three main macroeconomic objectives of the government?
- Price stability (inflation between 2 and 3 per cent).
- Economic growth (target rate is between 3 and 4 per cent).
- Full employment (target rate of 5% unemployment).
Define economic growth.
Economic growth is defined as the increasing capacity of the economy to satisfy the material needs and wants of its members.
Why are high rates of economic growth unsustainable?
High rates of economic growth are unsustainable in a mature economy because it places pressure on the factor market (e.g. labour and raw materials) and risks driving up their prices (demand inflation).
What were the economic policy goals of the 1965 Vernon Report?
- High rate of growth.
- High rate of population growth.
- Full employment below 1-1.5% of the workforce.
- External viability.
- Stability of costs/prices
- Increasing productivity
- Rising living standards.
How and why might the Vernon Report no longer apply to government policy?
- Rapid economic growth is regarded as unsustainable from an environmental point of view.
- External viability is no longer valid. We now have a floating exchange rate (1983).
- Population growth is no longer relevant, as it was in the 50’s and 60’s when it was required to support infrastructure and resource projects needed to support the growth of a manufacturing economy. Knowledge and skills are more important today.
What happens when economic growth is too slow.
When economic growth is too slow, there is insufficient demand to employ those resources.
What does the extent to which growth helps achieve higher employment depend on?
The extent to which growth helps to achieve higher employment depends on whether the growth rate exceeds the rate of growth of the population and workforce. The extent of the growth-employment link is also determined by improvements in productivity, and structural changes.
What are the main benefits of economic growth?
- Delivers higher real incomes.
- Enables people to consume more goods and services.
- Creates more demand for productive resources, including labour.
What are the main costs of economic growth?
-Possibly unsustainable, pressure is placed on factor markets and risks driving up their prices (demand inflation).
Define price stability. What is the appropriate target?
Price stability occurs when there is little change in the general price level- that is, there are low rates of inflation.
The appropriate target for the inflation rate is 2-3 per cent.
What are the negative economic impacts of high inflation?
The negative economic impacts of high inflation are that high inflation reduces the buying power of households and firms, puts upward pressure on interest rates, erodes international competitiveness, widens the distribution of wealth and distorts the allocation of resources.
How does inflation erode the purchasing power of incomes?
Inflation erodes the purchasing power of household incomes (real incomes). Consumers are able to buy a smaller quantity of goods and services than they previously could, unless of course their income increases at the same rate as general prices.
Why must interest rates increase when prices rise?
When prices rise, interest rates must follow otherwise lenders are paid in inflated dollars which do not provide a positive rate of return. The real interest rate is more important than the nominal interest rate.
What is the effect of an increase in price on international competitiveness?
International competitiveness is eroded by price increases. For example, if inflation in Australia is higher compared to in New Zealand, the Australian product becomes relatively more expensive. Therefore, Australian products are less competitive.
This means there will be less exports, and so an increase in the CAD.
Similarly, imports become more competitive in the domestic market as their prices fall relative to those charged by domestic firms.
What is the relationship between inflation and the exchange rate?
The relationship between inflation and the exchange rate is a double-edged sword.
If our inflation rate was higher than that experienced overseas, we would predict a currency depreciation because demand for our exports would fall.
But, a depreciation means exports become more competitive, and imports become more expensive. The price of imports rise, which is inflationary.
Overall, the effect of a depreciation on inflation depends on the elasticity of imports and exports.
What is the effect of persistent inflation on confidence and investment decisions?
Persistent inflation erodes the confidence people have in money as a store of value, so they seek ‘hedges’ against expected price rises.
They purchase assets that are likely to appreciate in value e.g. property, antiques, or precious metals.
This speculation has a negative impact on the potential output of the economy.
Investment decisions are more risky in an inflationary environment because rising costs and prices make it more difficult to determine a rate of return on investment.
Give two examples of how sustained inflation may help to bring about structural changes in the economy?
e. g. Capital-for-labour substitution occurs if wages (the price of labour) rise faster than productivity, in which case labour ‘prices itself out of a job’, and employers replace labout with machines.
e. g. The rising oil prices that led to cost push inflation in the 1970s provided an incentive for companies to focus on energy efficiency and reducing fuel consumption.
How can households benefit from price increases?
Households that are able to anticipate inflation may be able to arrange their financial affairs to benefit from expected price increases, e.g. buy property.
How can sustained inflation effect taxation and government revenue?
Sustained inflation also effects taxation and government revenue. ‘Pay as you go’ taxpayers suffer bracket creep as inflation gradually causes their income levels to rise to levels where they are liable for higher marginal rates of taxation.
When does full employment occur?
Full employment occurs when everyone in the workforce who is willing and able to work can find a job.
Explain some issues hidden by the official unemployment rate.
- ABS data understates the true extent of joblessness in the workforce. Many people holding part-time or casual jobs would prefer to work longer hours, and are thus UNDEREMPLOYED.
- The average duration of unemployment has increased.
- Unemployment among young people is consistently higher than adult unemployment.
What will happen to low income earners during periods of high inflation?
The living standards of low income earners and recipients of transfer payments (e.g. pensions) will fall during periods of inflation unless these payments are indexed to compensate for price rises.
