4. Economic Policies - Fiscal policy

Question 1

Methods of financing budget deficits

Answer 1

Government can:
1. It can borrow funds from the private sector
2. Borrow from the Reserve Bank of Australia (RBA)
3. Borrow money from overseas

Question 2

how does gvt. borrow funds from private sector?

Answer 2

Government can issue government securities and sell them: known as deficit, bond or debt financing. Securities must be paid back with interest.

Question 3

Disadvantage of borrowing funds from private sector

Answer 3

May cause a rise in interest rates and ‘crowding out’ of private investment.

Question 4

How does gvt. borrow funds from RBA?

Answer 4

Government can instruct the RBA to ‘print money’ to pay the deficit. - monetary financing

Question 5

Advantage and disadvantage of monetary financing

Answer 5

Advantage: no change in interest rates, no extra public debt
Disadvantage: inflation as a result of an increase in money supply.

Question 6

How does gvt. borrow money from overseas?

Answer 6

Govt. can do this by getting the RBA to sell new securities in return for foreign currency, which are added to the RBA’s reserves.

Question 7

Advantage and disadvantages from overseas borrowing

Answer 7

Advantage: No effect on domestic interest rates.
Disadvantages: Government accumulates foreign debt. Affects current account.

Question 8

Methods of using budget surpluses

Answer 8

1. Retiring public debt
2. Finance future expenditure
3. Repay overseas debt

Question 9

how does gvt. Retire public debt

Answer 9

Govt. can reduce debt incurred with the private sector by purchasing old government securities previously sold to private sectors

Question 10

How does gvt. Finance future expenditure

Answer 10

Government can do this or pay for tax cuts in the present. Govt. could also bolster (support, strengthen) existent spending on infrastructure.

Question 11

advantage of retiring public debt

Answer 11

Interest on government debt is reduced - significant item of recurring expenditure

Question 12

Advantage of repaying overseas debts

Answer 12

Reduce net foreign debt. Reduce interest payable, thus reducing net primary income deficit on Current Account.

Question 13

What are the 2 outcomes to the budget?

Answer 13

Structural component (Discretionary Component)
And
The Cyclical component (Non-discretionary Component)

Question 14

Structural component to the budget outcome

Answer 14

Deliberate changes to government spending/taxation that affect the budget.

Question 15

Cyclical component to the budget outcome

Answer 15

Changes in the government spending/taxation determined by the level of economic activity.

Question 16

What is the purpose of the Automatic stabilisers

Answer 16

When the level of unemployment changes, there are automatic changes to the government spending or revenue. - Automatic Stabilisers - help to offset the extremes (booms/recessions) in economic cycle

Question 17

What are 2 automatic stabilisers

Answer 17

Welfare ; Progressive taxation

Question 18

Welfare role as an automatic stabiliser

Answer 18

during recession, spending on unemployment benefits increases automatically. Opposite is also true.

Question 19

Progressive taxation role as an automatic stabiliser

Answer 19

taxpayers pay an increasing proportion of their income in tax as incomes rise during a boom and vice versa. Taxation = leakage, during a boom this helps to constrain economic activity.

Question 20

What are the 2 economic effects of the budget

Answer 20

Economic activity ; resource allocation

Question 21

How is economic activity affected by budget outcomes

Answer 21

Changes in the stance of fiscal policy can impact on the level of economic activity
Generally, expansionary fiscal policy → larger budget deficit or lower budget surplus. This will increase the growth in agg. Demand and economic activity.

Question 22

How is resource allocation affected by budget outcomes

Answer 22

it is Through changes to the taxation system and changes in government spending decisions.

Changes in tax rates or the types of taxes will impact on how resources are allocated between various types of production.

Question 23

Examples of resource allocation which impacts budget outcomes

Answer 23

Introduction of GST
Reduction in company tax rate
Removal of superannuation tax for 60+ yos
Introduction of carbon tax