Main Notes Flashcards
Compatible: economic growth and full employment
E.G creates more demand for goods and services, therefore, we need a larger workforce to cater for the growth
Compatible: Full employment and equitable income distribution
Lower unemployment means the proportion of people depending on welfare payments will decrease
Compatible: Price stability and economic growth
Keeping inflation low reduces uncertainty and encourages investment
Compatible: Efficient resource allocation (productivity) and economic growth
Higher productivity means more goods and services are produced for the same number of workers
Conflicting: price stability and full employment
The costs of goods and services can increase, because there are not enough workers available
Conflicting: economic growth and price stability
A booming economy puts pressure on the number of workers, their salaries and costs of making goods goes up
Conflicting: Economic growth and structural unemployment
Growth leads to changes in technology, therefore humans are being replaced by robots
Conflicting: Economic growth and equitable distribution of income
People working in expanding sectors (mining) may get more benefit compared to others who aren’t
Role of government
Provision of public goods and services
Provision of welfare services
Regulation of business enterprise
Macroeconomic management
Policy objectives
Sustainable economic growth 3-4%
Low unemployment, frictional being 1-1.5%
Price stability 2-3%
Increasing productivity
Rising standards of living
Having sufficient international currency reserves to meet international transactions
Strengths of fiscal policy
Direct, can be implemented immediately
Controls spending tap - better in a recession, increasing level of AD in economy
Weaknesses of fiscal policy
All lags - recognition, decision and impact lag
It’s inflexible - budget is relatively fixed
Politicians - fake promises to win votes
Needs to match monetary policy, not conflict with it
What does the government mainly/currently spend their money on?
Social security and welfare, health (new hospitals) and education
During a trough (government trying to increase spending, reduce taxes)
Expansionary stance
Reducing income tax = increases HH purchasing power
Decreases company tax = increases investment
Increased government spending on infrastructure = creates more jobs
(Ydef -> Yfe)
In a trough, the government uses its budget to increase to AE to counter the deflationary gap
During a peak (raises taxes, reducing spending within the economy)
Contractionary stance
Increased income tax and company tax
Decreased government spending on infrastructure (major projects)
Increases excise taxes - cars, tobacco and alcohol
(Yfe -> Yinf)
In a boom/peak, the government uses its budget to counter the inflationary gap
Neutral stance
Government neither trying to increase/decrease economic activity
Discretionary stabilisers
Reducing fluctuations in economic activity - via government
Automatic stabilisers
Reducing fluctuations through the B.C - without govt
Ways to finance a deficit
Sell government bonds
Borrow from the central bank
Borrow from overseas
(Crowding out effects)
Crowding out?
Do this in order to finance a deficit - selling gov bonds, borrowing from central bank (RBA) and borrowing overseas
Crowding in?
Relates to the use of a budget surplus; cuts taxes, pay off debts and fund projects
Federal budget?
Estimated sources of government income and the cost of current and capital expenditure plans for the coming year
