Chapter 5: AS Policies

Question 1

What is AS?

Answer 1

The total production of goods and services over a period of time by the nation’s businesses.

Note: It is especially affected by the availability of a nation’s resources and the efficiency with which these resources are used

Question 2

What are AS policies?

Answer 2

policies designed to create more favourable conditions for firms so that they become more willing and able to produce, causing an increase in AS and productive capacity by affecting access, cost or efficiency of resources (ACE)
International competitiveness

Question 3

How do AS policies differ from AD policies?

Answer 3

work in diff. ways + use diff. theories e.g. demand-side Keynesian economics (demand creates supply) vs. supply-side economics (supply creates demand)

work on slightly diff. problems - AD policies address cyclical problems e.g. demand inflation, cyclical unemployment etc. vs. AS policies address structural problems e.g. cost inflation, natural unemployment etc.

operate in diff. time frames - AD policies address short to medium-term drivers of economy vs. AS policies address longer-term factors

Question 4

What is efficiency?

Answer 4

The change in the ratio of output gained from per unit of inputs.

Question 5

What is economic efficiency?

Answer 5

When there is maximum output gained from a given volume of productive inputs, thereby maximising society’s general wellbeing and material living standards. It can mean allocative, dynamic, productive and intertemporal efficiency

Question 6

Define allocative efficiency

Answer 6

When resources are distributed in ways that maximise society’s satisfaction and minimise opportunity costs.

Question 7

How can AS policies improve allocative efficiency?

Answer 7

promoting strong comp. via measures like market deregulation so resources directed to areas of competitive cost advantage = minimise opp. cost

gov. intervention sometimes needed to correct market failure & promote more efficient allocation of resources

Question 8

Define Productive or Technical Efficiency

Answer 8

When lowest cost production methods are used and wastage of resources in making goods and services is minimised.
Anywhere along the lines of the PPF curve is technically efficient; increase in technical efficiency would help shift PPF outwards.

Question 9

How can AS policies improve productive or technical efficiency?

Answer 9

R&D grants lower COP, helping firms employ most efficient resources (e.g. best tech + equipment) to produce

Question 10

Define dynamic efficiency

Answer 10

When resources are reallocated quickly to increase choice and better meet the changing needs of consumers. Shown on PPF as moving along curve quickly.

Question 11

How can AS policies improve dynamic efficiency?

Answer 11

R&D grants to encourage firms to innovate, develop new products & be creative - encouraging market flexibility

Question 12

Define intertemporal efficiency

Answer 12

Refers to finding a balance between current consumption versus saving for future consumption. On PPF curve it can refer to anywhere not on the edges as either extremes are not balancing resources across long term

Question 13

How can AS policies improve intertemporal efficiency?

Answer 13

Tax reform
Investment in infrastructure
Subsidising certain areas of production

Question 14

What is international competitiveness?

Answer 14

Refers to the degree to which Australian firms can sell more attractive goods and services at lower prices than their overseas rivals.

Question 15

What are the main aims of AS Policies?

Answer 15

The main aims of aggregate supply policies is to increase AS (total quantity of goods and services a nation can produce) via the achievement of these goals:

Improving efficiency in resource allocation — growing Australia’s productive capacity, potential GDP and aggregate supply through increasing efficiency (the change in the ratio of output to input).

Boosting the sustainable, non-inflationary rate of economic growth — our rate of economic growth is limited to the speed at which our productive capacity can expand. This is dependent on the level of production that can be achieved from available resources at any given time.

Promoting low inflation by cutting production costs — aggregate supply policies such as market deregulation and infrastructure investment aim to keep costs down and thus reduce cost inflationary pressures on businesses.

Promoting full employment, especially in the long term — aggregate supply policies such as spending on education and training and welfare and tax reform can improve the flexibility and efficiency of labour resources and improve the employability of a greater number of people.

Increasing Australia’s international competitiveness — aggregate supply policies can make local businesses more internationally competitive by improving efficiency, and keeping production costs and inflation low.

Improve living standards as GDP per capita rises alongside a rise in average incomes and fall in unemployment/lower cost inflation and purchasing power

Question 16

What are AS budgetary policies?

Answer 16

Measures involving changes in the composition of gov. receipts and outlays that can grow a nation’s productive capacity and potential GDP

Question 17

Identify four specific AS policies

Answer 17

Investment in infrastructure
Spending on edu. + training
Gov. subsidies
R & D grants

Question 18

What is infrastructure investment?

Answer 18

Refers to gov. outlays on capital resources (G2)

Question 19

Identify and outline the two types of infrastructure

Answer 19

Social infrastructure: provision of capital goods to facilitate services like health + edu.

Eco. infrastructure: key physical/organisational structures within eco. that help eco. activity take place e.g. highways, railways, sea ports, airports, electricity capacity, gas, telecommunications, sewerage, water supply etc.

Question 20

Identify recent AS measures involving investment in infrastructure

Answer 20

Investment of $2 Billion on fast rail connection between Geelong & Melbourne
Additional $3 Billion to Urban Congestion Fund to address traffic levels
$2.2 Billion for local and state gov. road safety package
$4 bn Roads of Strategic Importance Fund, as part of $110 bn in infrastructure investment over the next decade

Question 21

How does infrastructure investment boost AS and the SSEG?

Answer 21

Improved infrastructure = improved ACE = favourable AS factor = more willing and able to produce = increased AS & GDP, pushing rate of growth towards target of 3-3.5%

Question 22

How does infrastructure investment boost AS and slow inflation?

Answer 22

Improved infrastructure = improved ACE = favourable AS factor = more willing and able to produce = increased AS & GDP = reduced cost inflation (sellers incur lower costs and pass on lower costs to consumers) = pushing towards goal of 2-3% increase in general price levels

Question 23

How does infrastructure investment boost AS and lower unemployment

Answer 23

Initial development of infra. requires more labour = job openings

Improved infrastructure = improved ACE = favourable AS factor = more willing and able to produce = business expansion = employ more labour = reduce unemployment rate towards goal of 4.5-5% + increased AS & GDP

Question 24

How does infrastructure investment improve international competitiveness?

Answer 24

Improved infrastructure = improved ACE = sellers able and willing to sell at lower market prices = more internationally competitive & able to expand

Question 25

How does infrastructure investment help support higher living standards?

Answer 25

Increasing SSEG and reducing inflationary pressures and unemployment = higher purchasing power + average incomes + production levels = higher levels of consumption + increased satisfaction of needs and wants (improved MLS) and improved happiness, self-esteem, health outcomes (improved NMLS)

Question 26

What are weaknesses of gov. investment spending on infrastructure?

Answer 26

Poor decisions: despite high levels of investment in infrastructure, multifactor productivity slowing. For some projects, returns barely outweigh the added costs. Long time lags in the implementation and completion of projects e.g. Sydney Airport = not a quick fix Financial constrains: projects are expensive, increase budget deficit and may add to gov. debt Infrastructure spending is too small for our rapid population growth: Despite billions of dollars in budget outlays, rapid population growth has meant that severe infrastructure bottlenecks remain in almost all key areas: electricity, roads, rail, water, aviation and telecommunications

Question 27

What is government spending on training and education?

Answer 27

Refers to current spending involving the provision of new training programs/spending on wages/outlays on fees and support for students/families, as well as capital investment spending on new school/uni buildings or equipment.

Question 28

AS policies are used in the long-term True or False?

Answer 28

True Used in the long-term to help increase skills, productivity, innovativeness and creativity of the Australian labour resources. Grows human capital, boosts productive capacity, GDP and AS.

Question 29

Identify recent examples of AS policy on training & edu.

Answer 29

$17.7 Billion into Uni Sector in 2019 = universities more able to provide high quality edu. to students and create better members of workforce later on

Question 30

How does spending on training and edu. boost AS and increase SSEG?

Answer 30

more productive workforce = improved ACE (higher output from given input = reduced COP) = favourable AS factor = more willing and able to produce = increased AS & GDP

Question 31

How does spending on training and edu. boost AS and slow cost inflation?

Answer 31

More productive labour = reduced average COP for bus. = favourable AS factor = more able and willing to produce = increased AS = reduced cost inflation

Question 32

How does spending on training and edu. boost AS and lower unemployment?

Answer 32

Improved employability of labour (more skilled and efficiency) = Improved ACE = favourable AS factor = willing and able to produce = increase employment of labour = increased AS and lower unemployment

Question 33

How does spending on training and edu. improve international competitiveness?

Answer 33

more productive workforce = improved ACE (higher output from given input = reduced COP) = able to sell more at lower market prices = more internationally competitive

Question 34

How does spending on training and edu. improve living standards?

Answer 34

By promoting SSEG, slowing inflationary pressures and reducing unemployment = grow average real incomes and purchasing power. Also, can help to reduce market failure and underproduction of public goods = improve allocative efficiency and more fully maximise the extent to which society’s material wants are satisfied.

Question 35

What are weaknesses of government budgetary spending on training and education?

Answer 35

Money misdirected: political considerations (as opposed to focus on social/economic outcomes) interferes with efficient allocation of resources, with some funding directed towards dubious resources (e.g. canteens, gyms) Poor educational outcomes (e.g. 30% of Australians do not reach national living standards) Funding promotes inequity of opportunity: use of recent education funding models mean that too many resources are directed towards private schools, unfairly widening the gulf in facilities and opportunities offered to students Budget financial constraints: funding for some programs reduced/abolished

Question 36

What are subsidies?

Answer 36

cash payments and/or tax concessions given by the government to producers/consumers

Question 37

What do budget outlays on targeted subsidies involve?

Answer 37

cash payments and/or tax concessions given by the government to producers/consumers to reduce production costs encourage efficient resource allocation & expand their productive capacity to grow AS in the long term.

Question 38

True or False The gov. has increasingly moved away from using subsidies to businesses as it can often lead to less efficient production.

Answer 38

True

Question 39

Identify specific examples of AS policies involving budget outlays on targeted subsidies

Answer 39

$130b wage subsidy introduced in 2020 JobKeeper = relief to businesses, preventing increase in unemployment child care subsidy = means tested financial support to reduce cost of childcare and increase labour supply (availability)

Question 40

How do targeted subsidies boost AS and accelerate SSEG

Answer 40

Lower COP = more able and willing to produce and do so at lower prices = more internationally competitive and may be encouraged to produce in areas of comparative cost advantage = increased AS and GDP + higher AD and economic growth

Question 41

How do targeted subsidies boost AS and slow cost inflation?

Answer 41

Lower COP = more able and willing to produce = increased production levels and lower prices passed onto consumers = increased AS and reduced cost inflation

Question 42

How do targeted subsidies boost AS and lower unemployment?

Answer 42

lower COP = businesses more able and willing to expand = increased demand for labour = boost AS and lower unemployment

Question 43

How do targeted subsidies improve living standards?

Answer 43

Increasing SSEG and reducing inflationary pressures and unemployment = higher purchasing power + average incomes + production levels = higher levels of consumption + increased satisfaction of needs and wants (improved MLS) and improved happiness, self-esteem, health outcomes (improved NMLS) Can reduce market failure due to underproduction of public goods or goods/services that have positive externalities or overproduction of goods that have negative externalities = improved allocative efficiency + increased satisfaction of society's needs and wants

Question 44

What are weaknesses of using spending on targeted subsidies as an AS policy?

Answer 44

financial constraints and trade offs: other budget outlays cannot go ahead + possible budget deficit = higher debt = possible higher debt for future gen reduced efficiency: may divert resources into areas of cost disadvantage or allow firms to remain inefficent and avoid restructuring production more effectively = lower pc and ls risk of gov. failure: may reduce society's welfare by being less efficient than of price system may not contain jobs political constraints: popular when given + backlash when taken away

Question 45

What are government budget research and development grants?

Answer 45

cash payments or tax incentives to cover the cost of r&d expenditure, designed to improve efficiency/quality of resources available for production.

Question 46

What effect can r&d grants have in the long-term?

Answer 46

Expand economy's productive capacity/potential GDP

Question 47

Identify examples of recent policy on R&D grants

Answer 47

Medical future fund during COVID - innovate ways of producing vaccines - allow people to

Question 48

How do R&D grants boost AS and accelerate SSEG?

Answer 48

increased efficiency of capital = lower average prices = more able and willing to produce = higher AS + GDP & more internationally competitive = increased AD, AS and eco. growth

Question 49

How do targeted subsidies boost AS and slow cost inflation?

Answer 49

Improved efficiency of capital = lower average costs = boosting AS & businesses pass on lower costs to consumers so reduced cost inflation

Question 50

How do targeted subsidies boost AS and lower unemployment?

Answer 50

Improved efficiency of capital = lower average costs = more able and willing to expand = increased demand for labour = lower unemployment

Question 51

How do targeted subsidies improve living standards?

Question 52

What are weaknesses of R&D grants?

Answer 52

Long impact time lags (not a short-term solution) Financial or budget constraints: weakened budget position due to pandemic ( This helps to explain the recent decline in government outlays on R&D grants as a percentage of GDP) Uncertain outcomes as success not guaranteed. Thus, increasing opportunity costs.

Question 53

What is government tax reform?

Answer 53

Changes in the ways that government collects revenue.

Question 54

In terms of their features, what do tax reforms involve?

Answer 54

lowering tax burden by reducing tax rates paid as proportion of income reviewing the tax base; seeing how widely tax is applied improving tax mix; using different types of taxes to raise revenue reducing tax avoidance

Question 55

By which three principles are tex reforms guided?

Answer 55

equity (high-income earners have greater capacity to carry more of tax burden, reducing wealth gap) simplicity (should be simple and easy for firms to follow) efficiency (should incentivise effort and earning of incomes by firms & individuals)

Question 56

Why is tax reform especially vital to help maximise Australia’s economic potential in the face of our ageing pop.?

Answer 56

increasing percentage of the population is not earning income or paying taxes note: it's also important to reduce the deficit

Question 57

Identify specific examples of tax reforms

Answer 57

cuts to personal income tax in 2020-2021 budget to boost AD, incentivise effort an boost AS 2014 abolishment of carbon tax to promote international competitiveness cut in small business tax rate to 25% in 2020-2021 budget

Question 58

How do tax reforms boost AS and lower cost inflation?

Question 59

How do tax reforms boost AS and promote SSEG?

Question 60

How do tax reforms increase AS and promote full employment?

Question 61

How do tax reforms improve living standards?

Question 62

What are weaknesses of tax reforms?

Answer 62

Inconclusive evidence: evidence that lower rates of personal income tax boost efficiency and lower productive capacity may be weak + debate from opposing side which suggests that higher taxes are needed to incentivise hard work, especially if over-generous welfare isn't an option Financial constraints: may add to structural budget deficit + reduced budget receipts may lead to lower provision of public goods, eroding future eco. growth and living standards -- To help minimise this risk, tax reforms should only reduce rates for those taxes that clearly deter effort and the growth of capacity, while generating adequate finance to strengthen the sustainability of the budget. Some feel tax reforms have been too small: Australian government has not gone far enough to see the full benefits of lower taxes Political constraints Trade-offs Tax-mix not optimal: over reliance on direct taxes

Question 63

What is welfare reform?

Answer 63

Changes in criteria to qualify for receiving cash benefits to increase consumption and living standards.

Question 64

How does the government determine who qualifies as the 'neediest'?

Answer 64

means tests assets test

Question 65

On what key areas have welfare reforms focused on?

Answer 65

Increasing positive/negative financial incentives to join workforce reducing disincentives for joining the workforce Ensuring that welfare outlays target the neediest (due financial constraints caused by current budget deficit and rising outlays caused by ageing population) Simplifying tax system to make it more transparent and accessible for users

Question 66

Identify recent policy involving welfare reform

Answer 66

Childcare subsidy Increased enforcement of access to welfare benefits Jobseeker encourages labour force participation rate (could be counterproductive by facilitating not getting a job - also blanket as everyone receives same benefit, but each possesses different skills that have different demands) Increasing pension age

Question 67

How do welfare outlays boost AS and slow cost inflation?

Question 68

How do welfare outlays boost AS and promote SSEG?

Question 69

How do welfare outlays boost AS and promote full employment?

Question 70

How do welfare outlays promote living standards?

Question 71

What are weaknesses of welfare reforms?

Answer 71

- slow wage growth

Question 72

What is immigration policy?

Answer 72

Laws and regulations around the movement of human capital into Australia.

Question 73

What is immigration policy?

Answer 73

Laws and regulations around the movement of human capital into Australia. Used to fill skill shortages where job vacancies cannot be filled by Australian labour resource.

Question 74

Why is there a need for immigration policy?

Answer 74

Australia is underpopulated for the resources it has. Australia has an ageing population

Question 75

What are problems associated with an ageing population?

Answer 75

increasing outlays (age pensions) - weakening budget position changes in resource allocation to supply goods and services demanded by older people reduced participation rate = labour and skill shortages

Question 76

Identify recent examples of immigration policy

Answer 76

2020 border closures due to COVID-19 2021 shortage of workers = accepting around 35,000 skilled immigrants into country to fill labour shortages

Question 77

How does immigration policy increase the demand for labour in the market?

Answer 77

More consumers = higher consumption levels and AD = firms need to increase production levels to meet this rising demand = increase demand for labour resources + higher employment

Question 78

What are weaknesses of immigration policy?

Answer 78

Can add to local unemployment Immigrants may be overqualified for their jobs as Australia may not recognise the skills brought by them