Topic 4: Economic Policies and Management

Question 1

economic objectives

Answer 1

• economic growth
• full employment
• price stability
• external stability
• environmental stability
• distribution of income

Question 2

economic growth objective

Answer 2

Sustainable growth

3-4% per year

Question 3

full employment objective

Answer 3

NAIRU
No cyclical unemployment
Production is maximised, prices are minimised

Question 4

price stability objective

Answer 4

2-3% inflation rate

Question 5

external stability objective

Answer 5

Government must be able to meet its long-term financial obligations

Question 6

environmental sustainability objective

Answer 6

Ecologically sustainable development

Question 7

distribution of income objective

Answer 7

More equitable distribution of income

Question 8

conflicts between economic objectives

Answer 8

Price stability and full employment
Economic growth and environmental sustainability
Economic growth and income distribution
Economic growth and external stability
Full employment and external stability

Question 9

purpose of macroeconomic policies

Answer 9

In general, macroeconomic policies work to smooth out fluctuations in the business cycle

Question 10

fiscal policy

Answer 10

The macroeconomic policy used by the government to influence the economy
Redistribution of income
Reallocation of resources
Merit goods
Reduce fluctuations in the business cycle
The budget is a record of all the planned spending and revenue for the forthcoming financial year

Question 11

budget revenue

Answer 11

Direct taxes
Indirect taxes
Sale of public assets
Operation of enterprises

Question 12

budget expenditure

Answer 12

Welfare system
Health
Education
Transport
defence

Question 13

budget outcomes and stances

Answer 13

Surplus
Deficit
Balanced

Expansionary
Contractionary
Neutral

Question 14

Factors that Affect the Budget Outcome

Answer 14

Discretionary (structural)
-Planned spending and revenue measures decided on by the budget and recorded in the budget
Non-Discretionary (cyclical)
-Changes in expenditure and revenue that arise due to changes in the business cycle, changes in automatic stabilisers
Automatic stabilisers: features of fiscal policy that act to offset changes in economic activity

Question 15

Managing a budget surplus

Answer 15

Pay off debt
Likely to stimulate consumption and investment if they’re paying domestic investors
If overseas, this will help external stability
Deposit with RBA
Special Wealth Fund
The Future Fund (2006)
Building Australia Fund (2009)

Question 16

Managing a budget deficit

Answer 16

Borrow from RBA (monetary financing)
Printing money - can lead to inflation
Borrow Domestically (debt financing)
Sale of government bonds
Can cause crowding out
Absorbs funds from domestic market meaning people are forced to borrow from overseas
Unlikely to occur in economic downturns
Borrow Overseas
Worsens external stability
Sale of Publicly Owned Assets (privatisation)
Syd Kingsford Smith Airport
Telstra

Question 17

benefits of fiscal policy

Answer 17

Specific targeting to certain areas of the economy

Supply Side benefits

Question 18

limitations of fiscal policy

Answer 18

Time Lags
-Recognition lag
-Decision-making lag
-Implementation lag
-Budget only formulated once a year
-expenditure/impact lag
-Short term
Political Considerations
-New laws need majority votes
-Public popularity
E.g. cutting protection
Global considerations
-Expectations of global markets and investors
Conflicting EConomic Objectives
-Eco growth + low inflation
-Low unemployment + low inflation
Must find compromise
-CAD and Foreign Debt
-Sustained budget deficit worsens the CAD and foreign debt

Question 19

monetary policy

Answer 19

The management of interest rates by the RBA in order to influence economic activity

Question 20

purpose of monetary policy

Answer 20

Price stability
-2-3% inflation target
Full employment
Economic welfare and prosperity of the Australian people

Question 21

implementation of expansionary monetary policy

Answer 21

RBA undertakes buying back of government securities, increasing the supply of cash in the market and lowering the cash rate
RBA buys government securities/bonds from financial institutions, transferring cash to the banks exchange settlement accounts

Question 22

implementation of contractionary monetary policy

Answer 22

RBA undertakes sales of government securities, lowering the supply of cash in the money market and lifting the cash rate
Financial institutions transfer cash to the RBA, decreasing the supply of cash in the exchange settlement accounts

Question 23

impact of expansionary monetary policy

Answer 23

Increases consumption as household mortgage repayments are lower
More investment by businesses
Decreased savings due to lower interest rates
Easier to access credit which increases consumption and investment
Increased asset prices - wealth effect
Depreciation in AUD - trade balance improves

Question 24

strengths of monetary policy

Answer 24

Short implementation time lag
Implemented independently of government, so limited political bias
Works better at halting aggregate demand than increasing it

Question 25

limitations of monetary policy

Answer 25

Long impact time lags Expansionary monetary policy may not lead to extra AD especially if there is limited confidence Some people see lower interest rates as a sign of a weak economy, reducing consumer confidence Inability to target particular areas of the economy Fiscal policy may undermine monetary policy External shocks make monetary policy less effective

Question 26

rationale for microeconomic policies

Answer 26

Designed to improve efficiency, productivity and international competitiveness Designed to shift long term aggregate supply to the right Should result in a better allocation of resources Often leads to structural changes

Question 27

types of efficiency

Answer 27

technical/productive allocative dynamic

Question 28

technical/productive efficiency

Answer 28

Businesses producing the maximum output with minimum resources used

Question 29

allocative efficiency

Answer 29

Resources are allocated in such a way to reflect consumer preferences

Question 30

dynamic efficiency

Answer 30

Businesses being able to adapt to change in markets

Question 31

types of productivity

Answer 31

labour capital multifactor

Question 32

product market

Answer 32

The market where final goods and services are sold

Question 33

factor market

Answer 33

The market where factors of production are traded, like labour

Question 34

national competition policy

Answer 34

Designed to increase competition in natural monopolies like gas and water services Established the ACCC Limits anti-competitive behaviour such as cartels Reform implemented to open up monopoly industries

Question 35

examples of microeconomic policy

Answer 35

``` Privatisation of Government Enterprises -E.g. Qantas and Telstra Financial Deregulation -Allowing banks to set own interest rates -Reduction in protection -Floating exchange rate 1983 ```

Question 36

benefits of microeconomic policy

Answer 36

Greater competition through deregulation of markets and eliminating anti-competitive behaviour Higher productivity, economic growth and lower prices Expanding industries require more labour, reducing unemployment Enhanced international competitiveness will lead to more exports and greater external stability Can target specific industries that are inefficient

Question 37

limitations of microeconomic policy

Answer 37

May cause price rises if the monopoly was previously subsidised May cause short term structural unemployment 50,000 people lost jobs when car manufacturing ceased in Australia Political conflicts