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econ 3/4 > econ U4 AOS1.2 > Flashcards

econ U4 AOS1.2 Flashcards

1
Q

AD formula
- think in relation to AD policies

A

AD = C + I + G + (X-M)

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2
Q

2 AD policies + brief description

A

budgetary policy - govt revenue & expenses
monetary policy - manipulation of interest rates by RBA

budgetary & monetary policies work in diff ways to smooth out the level of AD & the business cycle to prevent booms & busts
- if AD is too high these policies will slow it down & vice versa

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3
Q

describe budgetary policy
- importance
- how it stabilises the business cycle

A

an AD strategy that is directed by the treasurer & involves estimates of changes in the level & composition of budget receipts [revenue] and budget outlays [expenses] for the year ahead to help promote economic stability

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4
Q

contraction

A

contraction = economy is slowing down therefore, bad for living standards
fix:
- increase gov spending = increase AD
- cut interest rates & taxes

expansion = too much economic activity, tight labour market & high inflation
monetary policy:
- raise interest rates to slow spending & decrease AD
budgetary policy
- increase taxes & decrease gov spending `

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5
Q

sources of govt revenue

A

Direct tax: 70% of all govt budget
- income
- corporate
- medicare levy

Indirect tax: 25% of all govt budget
- GST
- Excise taxes
- Tariffs

Non tax revenue:
- sale of gov assets or revenue from gov businesses
- interest

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6
Q

types of tax scheme

A

progressive tax rate
- personal taxes
- means the more an individual earns the higher tax rate they will pay on their income

regressive tax
- GST; flat tax that acts regressively bc those on lower income end up paying more gst as a percentage of their income bc a higher proportion of their spending goes on items w gst attached
- tax rises as a percentage of ones income as income falls

proportional tax
- business tax where regardless of revenue that all pay the same tax rate

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7
Q

examples of govt outlays

A
  • welfare; centrelink
  • health
  • education
  • defence
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8
Q

types of govt spending

A

G1 current spending
- day to day (operational spending) the cost of running the govt
–> welfare payments, maintenance & cleaning

G2 capital spending
- govt investment into physical assets
–> new schools, new roads, new metro tunnels

Transfer payments (redistribution) [does not make up any part of AD formula only impacts AD indirectly]
- one way payments not in exchange for anything
–> aged pension, youth allowance [centrelink]

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9
Q

what is underlying cash balance [UCB]?

A

underlying cash balance [UCB]
- key fiscal measure used to assess the budget outcomes

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10
Q

ways of reporting the budget outcome
- underlying cash balance in $ terms
- proportion of gdp in % terms

A

headline cash outcome = unadjusted figure representing difference b/w the total value of cash receipts minus total value of cash outlays collected by the govt
receipts - outlays = headline cash surplus/deficit

underlying cash outcome = adjusted figure represented as headline cash outcome minus one off items from future funds & net cash flows from investments in financial assets

underlying cash balance - GDP
UCB/size of economy

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11
Q

budget outcomes

A

2022/23 - $22.2Bn surplus (contractionary)
–> E < R [money left over]

2023/24 - $9.3Bn surplus (becoming less contractionary)
–> E < R [money left over]

2024/25 $28.3Bn deficit [forecast] (expansionary)
–> E > R [in debt]

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12
Q

buget outcome vs debt

A

budget outcome - a measure of the diff b/w revenue & expenses over a period of time

debt - stock measurement at a point in time

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13
Q

financing a deficit
[govt]

A

expenses > revenue
–> can sell bonds to local investors, o/s investors, RBA

  1. borrow from o/s
    - by selling Australian govt bonds to foreign investors. Bc in a budget deficit the international rates are lower, making repayments cheaper. however, borrowing o/s adds to NFD which may erode our international credit rating and weaken the current acc balance and debits on NPI
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14
Q

utilising a surplus

A

revenue > expenses
1. Pay off debt
- may cause interest rates to decrease, stimulating spending & offsetting the initial contractionary effects on the govt surplus economy
2. Invest; FutureFund
3. Save

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15
Q

relo b/w budget outcome & level of govt debt - Deficit

A
  • expenses > revenue over a financial year
  • must be financed by selling bonds
  • increasing total stock of govt debt
    –> increase in debt = increase in interest repayments which is an expense for the budget.
    –> increasing size of future deficit
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16
Q

relo b/w budget outcome & level of govt debt - Surplus

A
  • revenues > expenses over financial year
  • may choose to use this surplus to:
    –> pay off debt [maturing bonds], save or invest
  • decreasing total stock of govt debt
17
Q

impact of deficit budget outcome trends from govt

A

anytime govt runs a deficit debt increases
- as they must sell an equal amount of bonds to finance the debt
- debt increases just at a slower rate

18
Q

disadvantages of a budget deficit

A
  1. loss of a nations good credit
  2. increase interest payments take money away from community services
  3. less ready to deal w economic crisis
  4. increased debt is unsustainable & a burden for future gens
19
Q

automatic stabilisers [cyclical component] & their influence on AD at stabilising the business cycle

A

automatic stabiliser - unconscious changes built into the budget that work to smooth out the business cycle without government intervention working counter cyclically

example:
In expansion
commodity prices increased; mining royalties increased
unemployment declined thus less welfare payments meaning income tax receipts increased & vice versa
–> increases leakages out of circular flow & decreases injections into economy slowing AD & econ growth
——> In contraction it is just the vice-versa

20
Q

effect of auto or discretionary changes in budget outcome & govt debt

A

In expansion
unemployment declined
- less welfare payments [dec G1 govt spending]
- meaning income tax receipts increased [inc govt revenue] & vice versa
–> increases leakages out of circular flow & decreases injections into economy slowing AD & econ growth

resulting in
- increased surplus for 23-24 financial year
& vice versa

could:
- increase surplus
- decrease deficit
- move from def -> surplus

21
Q

automatic/discretionary stabilisers on outcome/debt

A

increase surplus = decrease govt debt
increase deficit = increase govt debt
reduce deficit = increase govt debt but decreasing govt debt growth rate
reduce surplus = decrease govt debt

22
Q

define budget stance

A

relates to whether the change in budget outcome is intended to have an expansionary, neutral or contractionary impact on the level of AD and eco activity

23
Q

stance of budgetary policy [BP]

not vital

A
  • How budget is used to impact the economy

using budget to expand AD & activity = expansionary stance

using it to contract AD & activity = contractionary stance

24
Q

stances & outcomes

[not vital]

A

if the budget is contracting the level of AD and the level of activity
- budget outcome must be in surplus or moving from deficit to surplus
- revenues are growing faster than expenses
vice-versa

25
Q

outcome & stances

A

increased surplus = more expansionary
decreased surplus = less expansionary
increased deficit = more contractionary
decreased deficit = less contractionary
from deficit -> surplus = contractionary
from surplus -> deficit = expansionary

26
Q

strengths & weaknesses of budgetary policy [govt]

A

strengths
1. can target areas of weakness
- by changing the composition/structure of expenses or revenues
- monetary policy cant target it impacts the entire economy
2. budget impacts the level of AD relatively quickly to monetary policy
3. can increase both AD [in short term] and AS [in long term] while monetary policy does not have AS impacts

weaknesses
1. subject to political bias rather than economics
- monetary policy is independent of politics
2. subject to financial constraints due to govt need/want to bring the budget back into surplus & reduce public debt
3. long term implementation lag
- must be voted on by both houses of parliament
- takes a long time to create the policies and pitch it

27
Q

have we achieved our macroeconomic goals in 23-24 financial year

A

full employment NAIRU = 4-4.5% currently at 4% [achieved]

SSEG 3-3.5% currently 1.1% [not achieved -> below]

low & stable inflation 2-3% currently 3.6% [not achieved -> above target]

28
Q

Monetary policy impact AD only!!!
- controlled by RBA

A

not vital

29
Q

interest rates

A

reward for saving or cost of borrowing money

30
Q

not vital

A

RBA is independent of the govt

31
Q

role of RBA

A
  • implement monetary policy
  • issuing notes & coins; currency is a call on the reserve bank
  • banker to the fed govt
  • banker to the commercial banks
31
Q

role of RBA in respect to monetary policy

A

to achieve the 3 macroeconomic goals:
goal of full employment
- The lowest rate of unemployment that can be achieved without running into excessive inflationary pressure. Often referred to as the NAIRU, and is currently considered to be 4.5%.

  • goal of SSEG
    the highest growth rate possible, consistent with strong employment growth, but without running into inflationary, environmental or external pressures. Generally considered to be within the range of 3 - 3.5% per annum.
  • goal of low & stable inflation
    2-3% growth in inflation per annum on average over the course of an economic cycle to maintain price stability within the economy.
32
Q

conventional monetary policy
[cash rate target & how that impacts interest rates]

A
  • RBA can control the cash rate commercial banks borrow & lend to each other at
  • cash rate is borrowed & lended in the “overnight money market”
  • in theory banks then pass those cash rate costs over to their customers via a decreased or increased interest rates
33
Q

exchanged settlement accounts

A
  • all commercial banks must hold an acc with the RBA
  • this is used to settle transactions in batches
  • ES accounts must be positive at the end of the day [after all transactions have been settled]
34
Q

how does the RBA target the cash rate

A
  • the RBA intervenes in the overnight money market [OMM] to settle their ES account
  • the RBA intervenes by placing a restricted cash rate in the OMM called a ‘deposit rate’ and ‘lending rate’
    –> the rates of interest the banks will gain from the RBA for having money in their ES account
  • the ‘deposit rate’ is the rate the RBA will pay banks who have a surplus $ in their ES accounts
  • the ‘lending rate’ is the rate RBA will charge banks who have a deficit $ in their ES accounts

deposit rate = cash rate target [CRT] - 0.10% [10 basis points]
lending rate = CRT + 0.25%

35
Q

OMM

A
  • supply is perfectly inelastic as the RBA controls the supply of ES balances and money in the market
  • P$ = cash rate
  • Q = ES balances

demand line is not infinite but plateaus at the lending & deposit rate

36
Q

unconventional monetary policy

A
  • unconventional monetary policy tools r used by the rba in conjunction with conventional monetary policy [cash rate targeting] to help achieve their 3 macroeconomic goals
  • unconventional tools r mostly used in extreme situations
  • conventional & unconventional always push for the same outcome
    e.g. asset purchasing [quantitative easing or tightening], forward guidance, yield targeting
37
Q

forward guidance

A
  • involves the RBA providing information about the future course of interest rates and its monetary policy settings
  • the RBA publishes forward guidance through its monetary policy [cash rate decision]. monetary policy statements and other media releases
38
Q

23/24

24/25 budget

A

US $95/tonne iron ore

US $65/tonne iron ore

econ 3/4 (9 decks)

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