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Economics > Australia's Economy > Flashcards

Australia's Economy Flashcards

1
Q

Price Stability

A
  • A goal of monetary and fiscal policy aiming to support sustainable rates of economic activity.
  • Ensures that there is a gradual and sustainable rise in general price levels of goods and services
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2
Q

Price stability target

A

Target inflation: within 2-3% per year

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3
Q

How is price stability/inflation measured?

A
  • Using consumer price index (CPI)
  • Measures the percentage increase or decrease in prices of bundles of products.
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4
Q

What causes price stability?

A
  • Governments can raise or lower taxes and adjust government spending to influence the amount of disposable money in the system
  • Price levels are driven by supply and demand
  • As supply rises, prices drop, as demand rises, prices rise
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5
Q

What causes inflation?

A
  • Demand-pull inflation (increased demand exceeds supply)
  • Cost-push inflation (rising production costs)
  • Built-in inflation (wage-price spiral).
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6
Q

Effects of price stability

A
  • Decreases volatility of inflation, lowering uncertainty and market interest rates, motivating people to invest, which will increase the economy’s capacity to produce goods and services
  • Contributes to a more stable economy
  • Helps maintain social cohesion and stability
  • Preserves integrity and purchasing power of money
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7
Q

Australia’s current effectiveness in reaching price stability goal

A

Current inflation rate in Australia is 6%, which is double the target rate of 2-3%.

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8
Q

What helps sustain price stability?

A

The RBA can adjust loan interest rates to encourage people to get them, thus increasing investment which will increase the economy’s capacity to produce goods and services.

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9
Q

Externalities affecting price stability

A

COVID-19 significantly impacted supply, which caused high levels of inflation due to a mismatch in the supply and demand of goods. These effects can still be seen in Australia’s economy today.
Other examples
- Pandemic
- War
- Oil shock
- Financial disasters

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10
Q

Full Employment (+ what does it result in)

A

A condition in which all or nearly all individuals who are willing and able to work are employed, resulting in a very low unemployment rate and optimal utilisation of labor resources.

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11
Q

Target unemployment rate

A

4.5-5%

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12
Q

Full employment measurement

A

Full employment is measured through the unemployment rate.

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13
Q

Unemployment rate

A

Refers to the percentage of people in the labour force (willing and able to work) who are unemployed.

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14
Q

Types of unemployment

A
  1. Frictional unemployment
  2. Structural Unemployment
  3. Classical unemployment
  4. Voluntary Unemployment
  5. Cyclical Unemployment
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15
Q

Frictional unemployment

A

Caused by the time people take to move between jobs . This will always occur because it takes time for people to find jobs.

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16
Q

Structural unemployment

A

Occupational immobolities (harder to learn new skills), geographical (harder to move regions to find jobs), technological change (changes in demand), etc.

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17
Q

Classical unemployment

A

Wages in a market are pushed above equilbrium. For e.g. the supply of labour is more than the demand.

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18
Q

Voluntary unemployment

A

People choose to remain unemployed.

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19
Q

Cyclical unemployment

A

The economy is below full capacity. Demand can fall leading to less output and negative growth. In recessions, unemployment rises.

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20
Q

Effects of a high unemployment rate

A
  • Less tax revenue and higher government borrowing
  • Loss of human capital
  • Inefficient use of resources
  • Poverty and Homelessness
  • More criminal activities
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21
Q

Australia’s effectiveness in reaching full employment

A

The current unemployment rate in Australia is 3.5%, which is 1%-1.5% lower than the target unemployment rate of 4.5%-5%.

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22
Q

External factors impacting unemployment rates

A
  • The COVID-19 pandemic caused unemployment rate to increase by 1.3% from the previous year to 6.46%, a result of the public health measures taken to control the virus resulting in less demand and therefore less jobs.
  • In 1932, during the Great Depression, the Australian economy collapsed and had a 32% unemployment rate.
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23
Q

Business trade cycle

A

Refers to the fluctuations in the growth of real output, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output).

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24
Q

BTC expansion

A

Occurs when there is positive growth in real GDP shown by parts on the curve that slope upward.

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25
Q

Characteristics of BTC expansion (periods of real GDP growth)

A
  • Employment of resources increases
  • General price level of the economy (an average over all prices) usually begins to rise more rapidly (inflation).
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26
Q

GDP formula

A

GDP = consumption + investment + government spending - trade

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27
Q

BTC peak

A

Represents a cycle’s maximum real GDP, and marks the end of the expansion.

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28
Q

Characteristics of a peak in the BTC

A
  • Unemployment of resources has fallen substantially
  • General price level may be rising quite rapidly
  • The economy is likely to be experiencing inflation.
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29
Q

BTC contraction

A

A period in which the economy begins to experience falling real GDP (negative growth), shown by the downward-sloping parts of the curve. This follows a peak.

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30
Q

Characteristics of a BTC contraction

A
  • Falling real GDP
  • Growing unemployment of resources.
  • Increases in the price level may slow down
  • It is even possible that prices in some sectors may begin to fall.
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31
Q

BTC trough

A
  • Represents the cycle’s minimum level of GDP, or the end of the contraction.
  • There may now be widespread unemployment.
  • Followed by a new period of expansion (also known as a recovery), marking the beginning of a new cycle
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32
Q

Recession

A

When a contraction lasts six months (two quarters) or more.

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33
Q

What does growth in real output (GDP growth) provide?

A

Opportunities to achieve higher incomes and higher standards of living.

34
Q

Macroeconomic objectives

A
  • Reducing the intensity of expansions and contractions, would lessen the problems of rising price levels in expansions and unemployment in contractions.
  • Increasing the steepness of the line by achieving more rapid economic growth over long periods of time.
35
Q

Indicators

Define and state the three categories

A

Anything that can be used to predict future financial or economic trends.
- Leading indicators
- Lagging indicators
- Coincident indicators

36
Q

Leading indicators

A

Signal future events.

37
Q

Examples of leading indicators

State at least three

A
  • Share Prices
  • Building approvals
  • Levels of stock (inventory) held by firms
  • Manufacturers new orders
  • Business and consumer confidence
  • Consumer expectations
  • New employment vacancies
  • New business start-ups
38
Q

Lagging indicators

A

Follow an event.

39
Q

Examples of lagging indicators

State at least three

A
  • Unemployment is one of the most popular lagging indicators.
    • If the unemployment rate is rising, it indicates that the economy has been doing poorly.
  • Consumer Price Index (CPI) — measures changes in the inflation rate.
  • Interest rates
  • Consumer debt
  • Bankruptcies
40
Q

Coincident indicators

A

Occur at approximately the same time as the conditions they signify.

41
Q

Examples of coincident indicators

State at least three

A
  • Personal income
    • High personal income rates will coincide with a strong economy.
  • GDP
  • Manufacturing output
  • Sales of consumer durables
  • Production of building materials
  • Retail sales
  • Job advertisements
  • Motor vehicle sales
  • Money supply
  • Capacity utilisation
42
Q

Monetary Policy

A

A set of factions available to a nation’s central bank to achieve sustainable economic growth by adjusting the money supply.

43
Q

Cash Rate

A

The interest rate that a central bank — such as the RBA or Federal reserve — will charge commercial banks for overnight loans.

44
Q

What is the main tool of monetary policy?

A

Cash rate

45
Q

Monetary policy objectives

A
  1. The stability of the currency of Australia (keeping inflation rates low and stable)
  2. The maintenance of full employment in Australia (natural rate: 4.5%)
  3. The economic prosperity and welfare of the people of Australia (keeping living standards high)
46
Q

Define currency stability

A

Interpreted to mean low and stable inflation.

47
Q

Define inflation

A

An increase in the general level of prices of the goods and services that households buy.

48
Q

Monetary policy transparency/accountability

A

The Reserve Bank’s decisions about monetary policy are explained publicly through several channels to ensure accountability:

  • Announcing and explaining the monetary policy decision on the day it is made
  • Releasing the minutes of the meeting two weeks late
49
Q

Three types of monetary policy

A
  • Expansionary
  • Contractionary
  • Neutral
50
Q

Expansionary monetary policy

A

Cash rate goes down

51
Q

Contractionary monetary policy

A
  • Cash rate goes up
  • Trying to stop people from spending their money
52
Q

Neutral monetary policy

A

Cash rate is 4.5%

53
Q

Define the transmission of monetary policy

A

Describes how changes made by the Reserve Bank to the cash rate – the ‘instrument’ of monetary policy – flow through to economic activity and inflation.

54
Q

Two stages of monetary policy transmission

A
  1. Changes to the cash rate flow through to other interest rates in the economy.
  2. → Changes to these interest rates affect economic activity and inflation through ‘channels’.
55
Q

3 Monetary Policy Transmission Channels

A
  1. Saving and Investment Channel
  2. Cash-flow Channel
  3. Asset Prices and Wealth Channel
56
Q

Saving and Investment Channel

A
  • A decrease in deposit rates (interest rates - i/r) reduces the motivation for households to save money, encouraging them to spend more on goods and services.
  • Lower lending rates (i/r) can stimulate increased borrowing by households.
  • As a result, lower lending rates support higher demand for housing assets.
  • Lower lending rates can increase investment (I) spending by businesses
57
Q

Cash-flow Channel

A

Interest rates influence the decisions of households and businesses by changing the amount of cash they have available to spend on goods and services.

58
Q

Asset Prices and Wealth Channel

A

Asset prices and people’s wealth influence how much they can borrow and how much they spend in the economy.

59
Q

Define fiscal policy

A

Refers to the use of government spending and taxation to:
- Affect the level of economic activity
- Affect resource allocation
- Affect income distribution.

60
Q

Discretionary fiscal policy

A
  • Deliberate use of taxes or government spending to influence the economy
    • e.g. direct taxes
  • Used when the Non-Discretionary FP is insufficient
61
Q

Non-discretionary fiscal policy

A
  • Automatic or built-in stabilisers
    • e.g. present tax structure, Unemployment benefits, etc.
  • Used to smoothen fluctuations of the economic cycle without need for govt intervention
62
Q

Define budget

A

A budget is the expected or proposed revenues and expenditures of the Government during a particular period, usually one year.

63
Q

What is the purpose of a budget?

A
  • Decides how revenue should be raised and funds allocated to areas of need.
  • Redistributes income from the wealthy to the less wealthy
  • Influences the level of macroeconomic activity
64
Q

Budget outcomes

A
  • Neutral
  • Deficit
  • Surplus
65
Q

Expansionary fiscal policy

A

Fiscal policy that increases aggregate demand directly through an increase in government spending.

66
Q

Contractionary fiscal policy

A

The government taxes more than it spends—either by increasing tax rates, decreasing spending, or both.

67
Q

Define government revenue

& Give three examples

A
  • Money received by a government from taxes and non-tax sources.
  • Examples: individual taxes, corporate taxes, GST (goods and services tax)
68
Q

Define government expenditure

& Give three examples

A
  • All government consumption, investment, and transfer payments.
  • Examples: defence, social welfare, health
69
Q

Neutral budget outcome

A
  • A balanced budget is where the value of government revenue is exactly the same as the value of the expenses.
  • It tends to have little effect on production, employment and inflation.
70
Q

Budget deficit

A
  • The value of the government revenue is less than the value of the government expenditure.
  • The budget will have an expansionary effect on AD and economic activity.
  • It tends to stimulate production, employment and possibly inflation.
71
Q

Budget surplus

A
  • The value of the government revenue exceeds the value of its expenses.
  • A surplus will have a contractionary impact on AD and economic activity
  • A surplus tends to limit growth in production, employment and inflationary pressure.
72
Q

Instruments of fiscal policy

A
  1. Involves changing tax revenue (T)
  2. Involves changing government expenditure (G)
73
Q

Describe:

Sustainable economic growth

(three characeristics)

A
  • Does not have significant pressure on the price of goods and services
  • Consumes resources at a rate that does not negatively impact future generations
  • Does not significantly deplete natural resources or cause significant harm to the environment
73
Q

Target economic growth

A

3-4% p.a

73
Q

How is sustainable economic growth measured?

A

GDP - total production of goods and services in the economy in one year

74
Q

Causes of sustainable economic growth in Australia

A
  • Legal and governance systems are transparent and trustworthy
  • Good protection of property rights (including intellectual)
  • Low taxes and adaptive regulatory make a good business environment
  • Mining investment has increased lately, playing into the hands of Australia who have a big resource extraction industry.
75
Q

Effects of sustainable economic growth

A
  • As an economy grows, goods and services become more affordable, and people become less poor.
  • Creates higher tax revenues.
  • Raises standard of living, increase in income.
76
Q

Australia’s current GDP growth

A

2-3%

77
Q

How is sustainable economic growth sustained?

A

As Australia’s GDP is based largely on the export of natural resources (coal, iron ore, gold, alumina) maintaining sustainable extraction practices is a good way of sustaining GDP growth, as well as using clean renewable energy sources, such as solar, hydro and nuclear.

78
Q

Sustainable economic growth externalities

A

Covid-19 led to a GDP decrease of -6%, however rebounded to an increase of 9% the following year.

Economics (4 decks)

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