Unit 4 AOS 1 (Deakin)

Question 1

What is the medium term operational goal of budgetary policy?

Answer 1

Return the budget to surplus at a prudent rate when economic conditions permit, without harming living standards.

Question 2

What are the four weaknesses of monetary policy?

Answer 2

Impact lag
No direct control of interest rates
Interest rate sensitivity (not spend income increase)
Blunt instrument, i.e. not targeted.

Question 3

What are the five strengths of monetary policy?

Answer 3

RBA is independent of political bias
implementation lag
Powerful impacter of AD
Flexibility to have unconventional and conventional policy
RBA can influence expectations

Question 4

How has monetary policy stance changed over the past two years?

Answer 4

Over the past two years, Australia’s monetary policy shifted from an expansionary stance with a record-low 0.10% cash rate (early 2022) to a contractionary stance, raising the rate to 4.35% by late 2023 to combat inflation above 7%.

Question 5

When is a time where unconventional monetary policy was used in the last two years?

Answer 5

Foward guidance, uncertainty.

Question 6

What is foward guidance and how can it boost AD?

Answer 6

Communication from a central bank about the likely future path of monetary policy, including future interest rates and other policy measures.

Builds consumer and business confidences and allows for them to plan.

Question 7

What is an ESA?

Answer 7

It is an account held with the RBA by banks to settle transactions with other banks.

Question 8

What is the STMM?

Answer 8

The STMM refers to the financial market where banks lend and borrow money to each other over short periods, usually overnight.

Question 9

What is the cash rate target?

Answer 9

The interest rate that the RBA aimsto achieve in the STMM.

Question 10

What is a neutral monetary policy stance?

Answer 10

A policy approach where the RBA sets interest rates at a level that neither stimulates nor slows economic activity.

Question 11

What is a restrictive stance

Answer 11

A policy approach where the RBA raises interest rates above the neutral level to slow economic activity and control inflation.

Question 12

What is an accomadtive stance>

Answer 12

A policy approach where the RBA lowers interest rates below the neutral level to stimulate economic activity.

Question 13

What is monetary policy stance?

Answer 13

The overall position or approach of the Reserve Bank of Australia (RBA) in setting interest rates to influence economic activity

Question 14

What are the three goals of the RBA?

Answer 14

Stability of currency.

The maintence of full employment

Economic prosperity and the welfare of Australians.

Question 15

What are transmission mechanisms?

Answer 15

The channels through which changes in monetary policy affect the broader economy

Question 16

How does higher cash rates impact the savings and investment channel?

Answer 16

A higher cash rate increases the cost of loans, thus discouraging consumers anf firms from taking out loans, reducing consumption. Higher rates on savings also increases the incentive to save, increasing leakages in the economy.

Question 17

How does lower interest rates impact the cash flow channel (in both ways?)

Answer 17

A lower cash rate decreases loan payments, thus increasing discretionary income.

Net lending households would earn less from their savings, however, most households are net borrowers, and so the former is the dominant effect.

Question 18

How do higher interest rates impact the exchange rate mechanism?

Answer 18

Higher relative interest rates increase capital inflows (seeking higher ROIs), thus appreciating the AUD, leading to less export demand and higher export demand (lower X-M)

Question 19

How does lower interest rates impact the credit availability mechanism?

Answer 19

Lower interest rates decrease the risk of borrower default, meaning banks may become less risk averseand thus increasing loan issuance. Therefore, consumption increases.

Question 20

How does higher interest rates impact the wealth/asset price channel?

Answer 20

Higher interest rates reduce demand for assets and thus reduce their values, hence reducing consumption due to the perceived change in wealth. Furthermore, lower asset values redcues the levverage of firms and consumers to access loans, lowering the abailability of credit.

Question 21

explain conventional monetary policy

Answer 21

Banks and government have ESA account with the RBA that must be positive at the end of the day
Some end with deficits, creating money market
RBA sets a borrowing rate .25% above the TCR to prevent anyone setting higher rates to other banks. Does a deposit rate similarly 0.1% below the TCR
RBA manages money supply to keep the cash rate closer to the TCR through OMOs, such as purchasing AGS to increase supply

Question 22

What is monetary policy?

Answer 22

An aggregate demand management strategy implemented by the Reserve Bank of Australia, mainly involving manipulation of interest rates to influence economic activity.

Question 23

What is the overview, strengths and weaknesses, and economic impacts of the New Housing Initiatives

Answer 23

Invests $6.2 billion in new housing initiatives, including $1 billion to states for new housing and essential services infrastructure

Economy:

May increase inflation due to greater demand for labour and for construction materials

Increased economic activity as it stimulates construction and related industries

Employment increases as jobs are required for the housing constructions.

A strength of the initiative is that it has precise targeting, i.e. specifically targeting the housing crisis

A weakness of the initiative is that it has time lags, as the houses may take time to be built.

Question 24

What is the overview, strengths and weaknesses, and economic impacts of the New Housing Initiatives

Answer 24

Invests $6.2 billion in new housing initiatives, including $1 billion to states for new housing and essential services infrastructure

Economy:

May increase inflation due to greater demand for labour and for construction materials

Increased economic activity as it stimulates construction and related industries

Employment increases as jobs are required for the housing constructions.

A strength of the initiative is that it has precise targeting, i.e. specifically targeting the housing crisis

A weakness of the initiative is that it has time lags, as the houses may take time to be built.

Question 25

What is the overview, strengths and weaknesses, and economic impacts of the Energy Bill Relief

Answer 25

Provides $300 energy rebates to all Australian households and $325 to eligible small businesses, totaling $3.5 billion in relief. Economy: May decrease inflation as lower business costs may translate to lower prices.  Increased disposable income may increase economic activity.  Limited impact on unemployment A strength of the initiative is that it directly impacts aggregate demand. A weakness of the initiative is that it may lead to greater use or production of fossil fuels, which presents a trade off against the government's net zero goal.

Question 26

What is the overview, strengths and weaknesses, and economic impacts of the Stage 3 Tax Cuts.

Answer 26

Delivers tax cuts to all Australian taxpayers, with an average tax cut of $1,888 or $36 a week by reducing tax rates and adjusting tax brackets. Economy: Higher inflation. Higher demand for labour to expand production and meet consumer demand, and Higher economic growth to meet consumer demand. A strength of the initiative is that it directly impacts AD A weakness of the initiative is that it conflicts with monetary policy

Question 27

What are four strengths of fiscal policy?

Answer 27

Quick response (for automatic) Precise targeting Direct impact Dual effect

Question 28

What are the six weaknesses of fiscal policy?

Answer 28

Psychological factors Political constraints Financial constraints Conflicting against monetary policy Goal trade offs Time lags

Question 29

What is budgetary stance?

Answer 29

relates to whether the change in the budget outcome (i.e. a deficit, balance or surplus) is intended to have an expansionary, neutral, or contractionary impact on the level of AD and economic activity.

Question 30

What are four issues with running a budget deficit?

Answer 30

Loss of a nations good credit rating Interest payments have an opportuntiy cost less able to deal with economic crisises burden is on future generations

Question 31

What are three examples of budgetary policy reducing the degree of market failure?

Answer 31

Funding for the provision of public goods such as defence and prisons. The provision or support of goods and services with positive externalities in production or consumption (tax concessions for R&D in renewable energy, for example.) Taxing goods or services with negative externalities in consumption or production (excise tax or carbon tax)

Question 32

How can the government help with unemployment with examples?

Answer 32

Budgetary policy has the flexibility to focus on particular unemployment concerns, whether structural, cyclical, long term or youth. Increased expenditure on training and education A wages subsidy to ensure firms can retain employees. Subsidies for firms to take on specific types of workers, such as aged  workers.

Question 33

How can the government expand economic activity to help achieve the goal of strong anf sustainable economic growth with examples?

Answer 33

Generally, the government can aid economic activity by increasing expenditure and reducing taxes, such as: Increasing G1 or G2 spending, such as infrastructure spending Decrease personal income taxes Increase transfer payments (such as welfare)

Question 34

What are three ways the government may aid with the goal of price stability?

Answer 34

Increase the structural surplus or reduce the structural deficit Increase taxes or decrease expenditure if inflation in demand driven. Provide incentives in investment or other supply side measures to reduce costs if inflation is supply driven (such as lowering the excise on petrol)

Question 35

How could a government stabilise a trough?

Answer 35

By allowing automatic stabilisers to play their part, and/or; Take a more expansionary stance by increasing expenditure and redcuing tax receipts.

Question 36

What are three reasons for a budget surplus?

Answer 36

If saved, can be used as a buffer in an economic downturn Add to investment balances in special funds, such as the Future fund Maintains confidence in aus govt finances by reducing debt, maintains AAA credit rating and hence low cost of capital. 

Question 37

What is fiscal consolodation?

Answer 37

measures designed to reduce the size of the budget deficit by increasing receipts relative to outlays

Question 38

How does selling bonds to the RBA affect the economy in an attempt to finance a deficit?

Answer 38

Selling bonds to the RBA puts money into circulation that was not previously, causing extreme inflationary pressures as purchasing power is diminished

Question 39

How does selling bonds to overseas investors to finance a deficit effect the economy?

Answer 39

Negatively impacts the external sector, as AUD appreciates, making exporters and impiort-competing firms less competitive.

Question 40

How does selling bonds to Australian individuals effect the economy?

Answer 40

It increases the demand anf competiton for money, increasing interest rates. This crowds out the private sector as their spending is constrained and they cannot access loans It also crowds out the external sector as the AUD appreciates, making the export and import competitng firms less competitive.

Question 41

What are the three ways a government can finance a deficit?

Answer 41

Selling bonds to Australian investors Selling bonds to overseas investors Selling bonds to the RBA

Question 42

What is an expansionary budget and a contractionary budget?

Answer 42

An expansionary budget is designed to increase economic activity by increasing injections relative to leakages. A contractionary budget is designed to restrict economic activity by increasing leakages relative to injections.

Question 43

What are the three most important government spends with estimated quantities?

Answer 43

Social secuirty and welfare - $250 billion Healthcare - $100 billion Education - $40 billion

Question 44

What is fiscal drag and it's two effects?

Answer 44

occurs when recipients of rising income gradually move into higher marginal rates of income tax, which raises their tax burden. Increase government tax receipts Decrease real disposable incomes Both of which work to slow the economy and act as automatic stabilisers.

Question 45

What is the fiscal strategy?

Answer 45

The fiscal strategy outlines the motivations under the budget and how they plan it will achieve economic prosperity.

Question 46

What are automatic stabilisers?

Answer 46

They are changes to the budget that occur without deliberate government intervention and result from changes in the level of economic activity.

Question 47

What are discretionary stabilisers?

Answer 47

They are deliberate policy decisions designed to change receipts or outlays in an effort to influence economic activity.

Question 48

What is the underlying cash outcome?

Answer 48

represents the budget's headline balance after subtracting the value of one-off volatile items, such as asset sales, special loans to state governments or debt repayments by other governments.

Question 49

What is the headline cash outcome?

Answer 49

Represents the annual difference between the total value of cash receipts collected by the government minus the total value of cash outlays from all sources

Question 50

What are the three budgetary outcomes?

Answer 50

Budgetary balance - receipts = outlays Budgetary surplus - receipts > outlays Budgetary deficit - receipts < outlays

Question 51

What are budgetary outlays?

Answer 51

Refers to how the government spends it's revenues to directly or indirectly provide goods and services to firms and consumers

Question 52

Define budgetary receipts

Answer 52

They are the federal government's incoming receipts of money that pay for outlays.

Question 53

What are the main sources of government receipts?

Answer 53

Majority taxes Revenue from government businesses Sale of government assets

Question 54

What are the three main government outlays?

Answer 54

Current(G1) -consumption  expenditure on G+S that are consumed in the current budget period and have no ongoing future benefits, such as stationary and public servant incomes. Capital(G2) - investment expenditure on capital assets that have ongoing benefits into the future, such as defence equipment or infrastructure assets. Transfer - redistrubution of funds to support individuals or entities, such as subsidies or welfare

Question 55

What are regressive taxes?

Answer 55

Regressive taxes are taxes where the proportion of income spent on tax increases with lower incomes, such as GST.

Question 56

What are proportional taxes with an example?

Answer 56

Proportional taxes are where the rate of tax stays the same regardless of income. A close example is company income tax (30% big firms, 25% small firms)

Question 57

What are progressive taxes with an example?

Answer 57

Progressive taxes is where higher income earners pay a higher percentage rate of tax than lower income earners, such as personal income tax.

Question 58

What are indirect taxes?

Answer 58

Indirect taxes are tazes levied on the production or sale of goods and services, that are paid for by consumers at the point of sale.

Question 59

What are direct taxes?

Answer 59

A direct tax are those levied on individuals and firms that recieve incomes, that is paid directly to the entity that levied the tax.

Question 60

What is the purpose of budgetary policy?

Answer 60

To assit in achieving the economic goals

Question 61

What is budgetary policy?

Answer 61

Budgetary policy is an aggregate demand strategy that relates to the manipulation of the level and compositon of government receipts and outlays for the upcoming year in order to acheive the economic goals