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Economics > Economic Growth: Concepts > Flashcards

Economic Growth: Concepts Flashcards

1
Q

What are the two biggest components of Australia’s aggregate demand?

A
  1. Consumption (50% of AD)
  2. Government spending (25% of AD)
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2
Q

What is Okun’s Law?

A

To prevent an increase in unemployment, GDP growth needs to be at least as high as the increase in productivity AND the increase in the size of the labour force in that year

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3
Q

According to Okun’s Law and research by the RBA, GDP growth in Australia usually needs to be…

A

3% each year

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4
Q

What was Australia’s average GDP growth between 2012-2019?

A

2.5%

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5
Q

What was Australia’s GDP growth in 2020?

A

-6%

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6
Q

What was Australia’s GDP growth in 2022?

A

4.2%

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7
Q

Why was Australia’s GDP growth low from 2012-2019?

A
  1. The end of the mining investment boom
  2. The fall in the ToT
  3. Contractionary fiscal policy (to reduce government and foreign debt following the GFC stimulus)
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8
Q

Why was Australia’s GDP growth low in 2020?

A
  1. Lockdowns reduced consumption by 20%
  2. Border closures reduced service exports by 45%
  3. Bushfires at the start of the year also reduced regional production
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9
Q

Why wasn’t Australia’s GDP growth even lower in 2020?

A
  1. Unprecedented fiscal stimulus
  2. Expansionary monetary policy and additional unconventionary monetary policy
  3. ToT spike
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10
Q

Why has Australia’s GDP growth been strong since 2021?

A
  1. Delayed changes to expansionary macro policy
  2. Recovery in consumption and construction following the end of lockdowns
  3. ToT is now higher than it was in the mining boom
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11
Q

What are the 4 transmission channels?

A

They are the ways a change in the cash rate flows through to a change in aggregate demand.

If the cash rate decreased, there would be:

  1. Lower savings and more consumption
  2. More borrowing and more consumption and investment
  3. More demand for houses, making people feel wealthier so consumption increases
  4. The AUD would depreciate, so exports would rise and imports would fall
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12
Q

The Australian Government’s fiscal stimulus in 2020 was $…

A

$291 billion

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13
Q

What was the Australian Government’s fiscal stimulus in 2020 spent on?

A
  • $100b on JobKeeper
  • $4b on JobMaker (though most of this wasn’t spent)
  • Temporarily doubled JobSeeker
  • One-off cash payments to welfare recipients
  • Cash Flow Boost payments and tax concessions for firms
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14
Q

Why did the Australian Government target cash payments to those on welfare during the pandemic?

A

Low income households have a higher MPC, (are more likely to spend the extra income), leading to a higher multiplier and higher overall impact on GDP

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15
Q

How did the RBA change the cash rate in 2020?

A

Cut it to 0.1% (lowest ever)

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16
Q

What were the RBA’s two types of unconventional monetary policy during the pandemic?

A
  1. Term Funding Facility
  2. Quantitative easing
17
Q

What is the Term Funding Facility and why did the RBA do it?

A

$190 billion of cheap loans to banks to be re-lent to firms.

This helped firms access funds for cash flow, to prevent potential bankruptcy during the pandemic

18
Q

What is quantitative easing and why did the RBA do it?

A

The RBA printed $281 billion to buy second-hand government bonds on the ASX, increasing the price of bonds and therefore reducing the interest investors receive on government bonds.

Investors would now be more willing to lend to firms at low interest rates instead

19
Q

What are examples of microeconomic reform by the Australian Government?

A
  • Trade liberalisation (removing protection), such as on the car industry in the 2010s
  • Labour market decentralisation (such as introducing enterprise agreements and individual contracts in the 1990s)
  • Financial deregulation (such as allowing foreign portfolio investment in the 1980s)
20
Q

What is economic growth in 2023?

A

2.7%

21
Q

How is economic growth expected to change over the next year?

A

RBA predicts it will fall to 1.5% due to contractionary monetary policy (both in Australia and by our trading partners).

Growth in consumption, service exports and housing construction have already started to slow

22
Q

How has the Australian Government used macro policy since the pandemic to reduce aggregate demand?

A
  • Stimulus measures (such as JobKeeper) have ended and the ToT spike has helped improve the budget
  • While fiscal was contractionary in 2022, it is slightly expansionary in 2023 due to the election
  • Monetary policy is contractionary, raising the cash rate faster than ever in the RBA’s history and doing quantitative tightening to revers the effects of QE

Economics (32 decks)

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