topic 6

Question 1

5 types of market failure

Answer 1

1. failure to provide public goods
2. failure to equitable distribute income
3. failure to efficiently allocate environmental resources
4. failure to ensure effective market competition
5. failure to control excessive swings in BC

Question 2

3 main types of market failure

Answer 2

1. failure to control excessive swings in BC
2. failure to equitable distribute income
3. failure to efficiently allocate environmental resources

Question 3

Macroeconomic tools of ___

Answer 3

fiscal and monetary policy control Aggregate Demand.

Question 4

What is monetary policy?

Answer 4

is a government action through the RBA to change interest rates through changes to short term interest rates

Question 5

What is fiscal policy?

Answer 5

broad government role regarding taxation and spending
- changes in direct and indirect tax (mid term –> budget expansion)
- changes to taxing, spending, borrowing (long term –> gov debts)
- changes tax framework
- affects C, I, G

Question 6

What is a collective good?

Answer 6

are goods and services demanded by the public as a whole, they are both merit and public goods
- non profitable and and provided by gov
- e.g pubic trading enterprises which used to be natural monopolies (e.g public transport, telecommunications)

Question 7

How does the government intervene with income inequality?

Answer 7

• minimum wage
• employment standards and work conditions
• unemployment welfare and training
• dispute resolution and unfair dismissal
• penalty rates
• fair work Australia’s 11 rights

Question 8

What is poverty?

Answer 8

is an enforced lack of socially perceived necessities.
Australia only has relative poverty.
- it is hard to draw a poverty line (factors include unemployment, under-employment, casualisation)
- links to crime, health, education and social problems (social cost)

Question 9

What is the poverty trap?

Answer 9

is that poor people think short term and spend instead of save (e.g rather children earn money than get higher education, choose welfare wages > job wages for poor people)

Question 10

How does the government redistribute income?

Answer 10

• taxing higher income earners
• welfare payments
• provides education, transport, health at lower costs –> social wage

Question 11

What is the Lorenz curve?

Answer 11

is a curve showing the proportion of national income earned (total wealth) of a given population percentage
represents the degree of inequality

Question 12

Steps to drawing a Lorenz Curve:

Answer 12

1. rank everyone from highest to lowest income
2. divide people into 5 equal quintiles and total quintile income
3. draw % of income on y-axis and % of population on x-axis
4. let each quintile be 20% of the x-axis and find the percentage of the quintiles total income/national total income
5. draw the line of equality (straight line at 45%)

Question 13

What is the gini-coefficient?

Answer 13

the proportion of the area taken up by the Lorenz Curve in relation to the overall are under the line of equality
1 = complete inequality
0 = no inequality

Question 14

What is the most important characteristic of monopoly powers?

Answer 14

barriers to entry as new firms can’t enter the market using
- legal restrictions
- economies of scale
- control of an essential resource

Question 15

What is the dead weight loss of the monopoly?

Answer 15

Due to a lack of allocative efficiency monopolies produce less but charge more so there is a debt weight loss (so there’s no gain for anyone)

Question 16

To improve monopoly efficiency:

Answer 16

• privatisation –> monopolies sold to market/investors
• corporatisation –> govt runs monopolies using private sector to maximise efficiency
• commercialisation –> govt run monopolies but want profit

Question 17

How to stabilise economic activity?

Answer 17

Government moves counter-cyclically to control the business cycle’s swings through their TAX and EXPENDITURE to maintain
1. sustainable economic growth (raise standard of living)
- done by expenditure
2. internal balance
- price stability and managing inflation (via interest rates)
- increase employment to a sustainable amount
3. external stability (countries debt)
- ability to buy imports from exports

Question 18

The federal government’s main fiscal weapon is the ___

Answer 18

annual budget divided into revenue and outlay to
- manage AD and economic activity
- resource allocation
- distribution of income

Question 19

Federal Revenue:

Answer 19

2020-21: $472
- 47% from income tax
- 18% from corporate tax
2022-23: $580B
- 45% from income tax
- 20% from corporate tax
2023-24: $680B
- 48% from income tax
- 20% from corporate tax

Question 20

Federal Outlay:

Answer 20

2020-21: $670B
- $227.5B for welfare
2022-23: $628B
- $222B for welfare
- $106B for health
- $45B for education
- $38B defence
2023-24: $684B
- $250.3B for welfare
- $106.5B for health
- $48.5B for education
- $42.8B for defence

Question 21

What is the budget outcome?

Answer 21

defines the annual NET gov Budgetary position in terms of SPENDING and REVENUE it is an important economic indicator
Budget outcome = taxation - spending
- GS>T –> deficit
- GS<T –> surplus
- GS=T –> balanced

Question 22

Using the economic indicators ___

Answer 22

inflation and unemployment we know which output gap we are in and therefore we should plan a budget surplus or deficit depending on the business cycle

Question 23

Planned budget outcomes using
Actual Budget outcomes using

Answer 23

accrual accounting (records revenue when money is going in/out as its being paid)
cash accounting (records revenue when money is recieved)

Question 24

Planned vs Actual budget outcome

Answer 24

2020-21: $-198/$-135
2021-22: $-143/$-80
2022-23: $-67 changes to $4/$28
2023-24: $-4B/???
contractionary

Question 25

What is fiscal consolidation?

Answer 25

a policy aimed at reducing government budget deficits and overall debt accumulation (e.g scomo) - government hopes surpluses balance debts - pay off debt

Question 26

What do taxes do?

Answer 26

taxes are collected by ATO 1. reduce inequality 2. change consumer's on producer's behaviour

Question 27

What are the broad categories of Tax?

Answer 27

PROGRESSIVE tax: use varying tax rates for taxing income (looking at taxes in comparison to income proportions to income) where higher earners pay more percentage tax --> fair not equal PROPORTIONAL tax: fixed single tax rate applied to taxable income. flat tax (e.g old corporate tax at 30%) --> equal not fair REGRESSIVE tax: same/fixed dollar amount paid regardless of income so the tax rate decreases the higher the income (e.g GST tax)

Question 28

Current income tax:

Answer 28

$18,200 = no income lowest: $18,201-$45,000 = 19c for each $1 over $18,200 highest: $180,001 = $51,667 + 45c for each $1 over $180,000

Question 29

Types of equity:

Answer 29

Equity is the fairness of tax system, burden based on ability to pay VERTICAL equity: higher earners pay greater proportion of tax bc they have greater ability to pay (higher income) --> more tax brackets HORIZONTAL equity: equal earners pay equal levels of tax --> talk about gender pay gap = 13.8%

Question 30

How to calculate tax:

Answer 30

Average rate of tax (ART) = tax payable/taxable income x 100 Marginal rate of tax (MRT) = change in tax payable/change in taxable income x 100

Question 31

Short term? Medium term? Long term?

Answer 31

- budget outcomes each year (e.g surplus or deficiti) - fiscal stances impact on Business Cycle and debt (contractionary or expansionary) - fiscal consolidation and ageing population and 3P's (values business cycle stability)

Question 32

What is an output gap?

Answer 32

is the difference between the actual level of GDP in an economy and the potential level of GDP at full resource employment

Question 33

What graph do you draw when talking about stabilisation of economy?

Answer 33

Business Cycle

Question 34

What graph do you draw when talking about budget outcomes?

Answer 34

x- axis = national income y-axis = taxation and govt spending taxation line being a positive sloped line govt spending being a straight line parallel to x-axis

Question 35

What are fiscal policy stances?

Answer 35

they examine the change in budget outchomes from sequence of consecutive budgets - EXPANSIONARY increases economic activity (more spending) - CONTRACTIONARY decreases economic activity (more taxation) - NEUTRAL no change to budget outcome

Question 36

Structural Story? link to AD

Answer 36

the result of discretionary initial decisions made in the budget estimates Accrual accounting is used as the govt has control over discretionary decisions TAXATION - 2018 --> 2024 $300B tax cuts - 2018 --> corporate tax progressive (stats) SPENDING - unplanned (2008 Rud's $52B injections during BFC)(2020 $200B jobkeeper) - planned (2021 $300B on AUKUS submarines) (health, education, etc)

Question 37

Cyclical Story? link to AD

Answer 37

outcome change due to economic conditions experienced during the year, resulting in the implementation of the automatic stabilisers Cash accounting is used as the government has no choice and has to react counter-cyclically to the business cycle (look at budget stances) - progressive tax (income tax threshold and rates, corporate tax, mineral tax, etc.) - unemployment benefits (2020 Jobseeker $690 fortnightly)

Question 38

What graph shows the 2 indicators of output gaps?

Answer 38

1. inflation 2. unemployment x- axis = quantity y-axis = price draw positive sloped aggregate supply line draw 2 negatively sloped aggregate demand lines (normal and increased) label arrows showing the increase in price = inflation and the increase in quantity = unemployment (labour is a derived demand) NOTE: if we increase 3P's, EG will increase without Inflation increasing

Question 39

stances impact on savings

Answer 39

- expansionary will reduce national savings - contractionary will increase national savings

Question 40

stances impact on resource allocation

Answer 40

changes to tax system and spending impacts resource allocation (e.g sales tax and subsidies, price floor, price ceiling)

Question 41

income distribution:

Answer 41

- progressive income tax - transfer payments --> rich to poor - social wage --> public education, transport, etc.

Question 42

What can the govt do with a budget surplus?

Answer 42

- repay government debt (e.g buying or selling bonds) - leave surplus with RBA as savings - establish special savings fun or sovereign fund to an emergency - part debt + part savings

Question 43

How do govts fund financial debt?

Answer 43

- print money (inflation) - borrow money domestically (avoid crowding out) - borrow money internationally - sell state assets (e.g quantas, telstra)