4 - Economic Policies And Management

Question 1

What does internal balance refer to?

Answer 1

Full employment of resources (including labour) and price stability where inflation rate is near to zero

Question 2

What does external balance involve?

Answer 2

Financing import expenditure with export income, stability of exchange rate and levels of net foreign liabilities and net foreign debt as percentages of GDP

Question 3

Intergenerational equity?

Answer 3

Economic growth is ecologically sustainable in terms of environmental quality being mai red for current as well as future generations

Question 4

Economic growth?

Answer 4

Increase in the economy’s production of goods and services over time and is measured by changes in real GDP adjusted for the rate of inflation

Question 5

Economic growth formula?

Answer 5

RealGDP (current) - realGDP (previous) / realGDP (previous)

Question 6

Why is sustaining eco growth important?

Answer 6

• rises real per capita incomes, employment creation & higher living standards
• expansion in economy’s productive capacity > employment opportunities
• more opportunities for investment in private and public infrastructure > increase in productivity + quality of life
• more opportunities from international trade and investment through specialisation of production according to comparative advantage

Question 7

Full employment?

Answer 7

Level of employment where demand for labour is equal to supply of labour - however some unemployment will still exist due to frictional and structural unemployment; known as natural rate of unemployment

Question 8

Non accelerating inflation rate of unemployment (NAIRU)?

Answer 8

Rate of unemployment that is consistent with a constant or non-accelerating inflation rate - estimated at around 5%

Question 9

Okun’s Law to reduce unemployment.

Answer 9

Rate of economic growth must exceed sum of productivity and labour force growth for unemployment rate to fall

Question 10

Benefits of reducing unemployment.

Answer 10

• increasing economy’s productive capacity and living standards
• minimising economic and social costs of unemployment

Question 11

What can rising inflation cause?

Answer 11

• reduces real incomes and living standards
• distortions in the economy eg. Misallocation of resources and loss in international competitiveness
• higher inflationary expectations (ie. Excessive wage and price demands)

Question 12

Underlying rate of inflation?

Answer 12

Removes ‘one-off’ seasonal or volatile factors from the headline or CPI calculation of inflation

Question 13

External stability?

Answer 13

Goal of AU meeting short and long term financial obligations with the rest of the world

Question 14

Elements of external stability.

Answer 14

1. Ensuring current account in bio is in equilibrium
2. Maintaining stability of exchange rate
3. Ensuring levels of net foreign liabilities and net external debt are sustainable as percentages of GDP.

Question 15

What is the sustainable position for the CAD?

Answer 15

Under -5% of GDP to stabilise net external liabilities and level of net foreign debt over time

Question 16

Environmental sustainability?

Answer 16

Current levels of economic growth and development should meet needs of the present generation without compromising ability of future generations to meet their own needs.

Question 17

Ecologically sustainable development principles?

Answer 17

Maintaining environmental quality such as clean air, water and access to other environmental resources

Question 18

Government policy objectives of achieving more equitable distribution of income?

Answer 18

• transfer payments to disadvantages social groups unable to earn income
• progressive taxation system to redistribute income
• proportion of taxation revenue to finance spending on elements of social wage such as public edu, health, transport, housing, community services
• selective targeting of welfare assistance > reducing incidence of poverty traps

Question 19

3 major objectives of economic policy: KvxHAsus

Answer 19

1. Economic growth
2. Internal balance
3. External balance
4. Equitable distribution of income and wealth u
5. Ecologically sustainable