3.2 - Domestic Macroeconomic Goals Flashcards

1
Q

Living Standards

A

The aggregate welfare of people in a country, made up of both material and non material factors

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2
Q

Material Living Standards

A

Refers to the level of economic wellbeing of individuals, and the quantity of tangible goods or services available for each person to consume

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3
Q

Non Material Living Standards

A

Refers to the quality aspects of a person’s daily existence

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4
Q

Factors Influencing Material Living Standards

A
  • Access to goods and services:
    o High access to goods and services achieves economic wellbeing and advances material living standards
  • Environmental quality:
    o Depletion of non renewable resources at an excessive rate leads to shortages and price rises, thereby reducing material living standards
  • Physical and mental health:
    o High quality health means individuals are more able to work, leading to higher incomes and improved economic wellbeing
  • Life expectancy:
    o A longer lifespan means individuals are able to work for longer, so will have higher incomes and improved economic wellbeing
  • Crime rates:
    o A high crime rate leads to higher insurance premiums, so less disposable income and reduced access to goods and services
    o Higher crime rates also mean individuals have reduced access to goods and services as there is a higher likelihood of theft
  • Literacy rates:
    o A higher literacy rate means individuals are able to access higher paying employment and higher skilled jobs, leading to greater income and better economic wellbeing
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5
Q

Factors Influencing Non Material Living Standards

A
  • Access to goods and services:
    o Improved access to goods and services leads to greater satisfaction
  • Environmental quality:
    o Improved environmental quality leads to better opportunity for outdoor recreation
  • Physical and mental health:
    o Improved health leads to lower stress and better quality of life
  • Life expectancy:
    o Longer life expectancy allows for greater time with family and friends so improves quality of life
  • Crime rates:
    o Lower crime rate leads to greater feelings of safety so allows for greater quality of life
  • Literacy rates:
    o Greater literacy rates allow for greater communication skills so allows for greater quality of life
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6
Q

Economic Activity

A

Production, income and expenditure that takes place in the economy

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7
Q

Components of Aggregate Demand

A
  • AD = C + I + G1 + G2 + X – M
  • C – total expenditure of goods and services by resident households and non profit institutions servicing households
  • I – expenditure with the purpose of expanding the productive capacity and productivity of firms
  • G1 – government current expenditure, such as salaries, health and education funding, but does not include welfare spending
  • G2 – government capital expenditure, such as infrastructure investment
  • X – expenditure by foreign households and businesses on Australian goods and services, including international students and international travel to Australia
  • M – expenditure by Australian households and businesses on overseas goods and services, including overseas travel
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8
Q

Factors Affecting Aggregate Demand

A
  • Changes to the general level of prices
  • Disposable income
  • Interest rates
  • Consumer confidence
  • Business confidence
  • Exchange rates
  • Levels of economic growth overseas
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9
Q

Aggregate Supply

A

The total volume of good and services that all suppliers have produced and supplied over a period of time

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10
Q

Production

A

The total volume of goods and services produced over a given time period

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11
Q

Productivity

A

Outputs from a given level of inputs

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12
Q

Productive Capacity

A

The point at which production is occurring at the maximum level possible in an economy

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13
Q

Factors Affecting Aggregate Supply

A
  • Changes to the general level of prices
  • Quantity of factors of production
  • Quality of factors of production
  • Cost of production
  • Technological change
  • Productivity growth
  • Exchange rates
  • Climatic conditions
  • Government regulation
  • International supply chain disruption
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14
Q

Business Cycle

A

The cyclical movement of economic activity over time

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15
Q

Peak Stage of Business Cycle

A
  • Nature:
    o High economic growth
    o High levels of inflation
    o Low levels of unemployment
  • Causes:
    o High consumer and business confidence
    o Low interest rates
    o High levels of global economic growth
    o High disposable income levels
    o High government spending
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16
Q

Contraction Stage of Business Cycle

A
  • Nature:
    o Lower economic growth
    o Lower levels of inflation
    o Rising levels of unemployment
  • Causes:
    o Lower consumer and business confidence
    o Higher interest rates
    o Lower levels of global economic growth
    o Lower disposable income levels
    o Lower government spending
    o Capacity constraints
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17
Q

Trough Stage of Business Cycle

A
  • Nature:
    o Low economic growth
    o Low levels of inflation
    o High levels of unemployment
  • Causes:
    o Low consumer and business confidence
    o High interest rates
    o Low levels of global economic growth
    o Low disposable income levels
    o Low government spending
    o Capacity constraints
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18
Q

Expansion Stage of Business Cycle

A
  • Nature:
    o Higher economic growth
    o Higher levels of inflation
    o Lower levels of unemployment
  • Causes:
    o Higher consumer and business confidence
    o Lower interest rates
    o Higher levels of global economic growth
    o Higher disposable income levels
    o Higher levels of government spending
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19
Q

Goal of Strong and Sustainable Economic Growth

A

The highest growth rate possible, consistent with strong employment growth but without unacceptable inflationary, external or environmental pressures
(3-4% REAL GDP)

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20
Q

Formula: GDP Growth

A

GDP Growth= (Period 2-Period 1)/(Period 1) × 100

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21
Q

Reasons to Pursue Economic Growth

A
  • Growth in real incomes from higher production → improved living standards
  • Lower unemployment rate → improved living standards
  • Increased tax revenue from incomes and profits → government able to increase spending on essential services without increasing public debt → improves living standards
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22
Q

Consequences if Growth is Too Low

A
  • No growth to real income
  • No fall to the unemployment rate
  • Government may need to run a budget deficit to pay for essential services
  • Ultimately will have a negative impact on living standards
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23
Q

Consequences if Growth is Too High

A
  • Growth may not be sustainable, leading to:
    o Inflationary pressures
    o Environmental pressures
    o External pressures → falling net exports → falling aggregate demand
  • Ultimately will have a negative impact on living standards
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24
Q

Employed

A

When someone of working age is working for more than 1 hour a week for remuneration

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25
Q

Unemployed

A

When someone of working age is not working but actively seeking employment

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26
Q

Hidden Unemployment

A

Individuals not seeking work so are not included as unemployed

27
Q

Underemployed

A

Individuals who are employed but would prefer to be working more hours

28
Q

Long-Term Unemployed

A

Individuals unemployed for more than 12 months

29
Q

Goal of Full Employment

A

The level of employment that exists when the government’s economic growth goal is achieved and where cyclical unemployment is non existent
(4-4.5% NAIRU)

30
Q

NAIRU

A

The lowest level of unemployment without causing inflationary pressures

31
Q

Formula: Labour Force

A

Labour Force= Employed+Unemployed

32
Q

Formula: Unemployment Rate

A

Unemployed/(Labour Force) × 100

33
Q

Formula: Labour Force Underutilisation Rate

A

(Unemployed+Underemployed)/(Labour Force) × 100

34
Q

Formula: Labour Force Participation Rate

A

(Labour Force)/(Working Age Population) × 100

35
Q

Impacts of Changes to Labour Force Participation Rate

A
  • Increase in participation rate → short term increase to unemployment but eventually placed downward pressure on wages and upward pressure on productivity
  • Decrease in participation rate → short term decrease to unemployment but eventually placed upward pressure on wages and downward pressure on productivity
36
Q

Structural Unemployment

A

When the skills of the unemployed do not match the skills required by the economy

37
Q

Seasonal Unemployment

A

When a person is unemployed because their skills are only demanded during certain times of the year

38
Q

Frictional Unemployment

A

When a person is unemployed for a time while they are moving from one job to another

39
Q

Hardcore Unemployment

A

When a person is unemployed due to mental, physical or other characteristics that prevent them from receiving a job offer

40
Q

Cyclical Unemployment

A

Unemployment that occurs when the economy is not operating at full capacity due to AD deficiencies

41
Q

Consequences of Unemployment

A
  • Loss of GDP – as the economy is not operating at full capacity and lower incomes reduce AD
  • Loss of tax revenue – reduced income means reduced income tax revenue
  • Greater income equality – more individuals reliant on welfare increases the gap between high and low income earners
  • Reduced living standards – unemployment lowers income so reduces ability to purchase goods and services, thereby reducing material living standards, while lower self esteem and higher crime reduce non material living standards
42
Q

Goal of Low Inflation

A

Achieve a sustained increase to the general level of prices between 2-3% on average over the medium term

43
Q

Inflation

A

A sustained increase in the general level of prices over time

44
Q

Disinflation

A

A reduction in the rate of inflation (slowing inflation)

45
Q

Deflation

A

A decrease in the rate of inflation (negative inflation)

46
Q

Measuring Inflation

A

Consumer Price Index – calculated by measuring changes in prices over a ‘basket’ of 100k goods and services, with weighting applied to each category

47
Q

Formula: Inflation Rate

A

(Price Index (period 2)-Price Index (period 1))/(Price Index (period 1)) × 100

48
Q

Headline Inflation

A

Captures price movements of all goods and services included in the CPI

49
Q

Underlying Inflation

A

Excludes volatile items, such as fruit, vegetables and fuel

50
Q

Causes of Inflation

A
  • Demand inflation: caused by changes to aggregate demand
  • Cost inflation: caused by changes to aggregate supply, supply side pressures or capacity constraints
51
Q

Consequences of Too High Inflation

A
  • Erodes purchasing power: a greater proportion of income is required to purchase the same amount of goods and services, leading to reduced access to goods and services and lower material living standards
  • Distortion of spending and investment decisions: rising prices can send false price signals to producers, leading to them reallocating resources despite no reduction to profit making opportunity
  • Reduction to international competitiveness: exports becoming more expensive in foreign currency terms → Australian goods and services becoming less competitive in foreign terms
  • Lower returns on investment: households have less incentive to save as the value of future consumption will be reduced
  • A wage price spiral may form: increasing inflation → real wages fall → workers demand higher wages → businesses seek to protect profits by increasing prices → inflation accelerates
52
Q

Consequences of Too Low Inflation

A
  • Delayed consumption: consumers may delay purchase as they expect prices to fall → reduced private consumption expenditure
  • Unemployment: business spending declines due to lower business confidence → reduced demand for labour
53
Q

Role of Households

A
  • Supply/sell their resources to firms
  • Use income to demand finished goods and services from businesses
54
Q

Role of Businesses

A
  • Purchase resources from households
  • Convert resources into goods and services
55
Q

Role of Financial Sector

A
  • Borrow savings from households
  • Lend savings to customers, who then use this for private investment expenditure
56
Q

Role of Government Sector

A
  • Collects revenue from taxation
  • Spends revenue as G1 or G2
57
Q

Role of External Sector

A
  • Includes imports of foreign goods demanded by Australians, and exports of Australian goods demanded by foreigners
58
Q

Aggregate Demand

A
  • Total expenditure on the goods and services produced in the economy over a period of time
59
Q

Importance of Aggregate Demand

A

Tells us the total potential expenditure on goods and services

60
Q

Importance of Aggregate Supply

A

Tells us the total potential output of an economy at any given time

61
Q

Impact of Low Unemployment on Inflation

A
  • Increased cost of production → cost inflation
  • Increased disposable incomes → demand inflation
62
Q

Impact of Government Regulation on Aggregate Supply

A
  • Reduced productivity
  • Reduced willingness to produce due to additional requirements/restrictions
63
Q

Relationship between Low Inflation and Strong and Sustainable Economic Growth/Full Employment

A

Low inflation is a precondition for other goals