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eco 22 > economic management > Flashcards

economic management Flashcards

1
Q

direct tax

A

tax borne by the individual/firm on whom it is levied & cannot be passed on

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2
Q

indirect tax

A

tax on aspects of economic activity other than income & can be passed on

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3
Q

non-tax revenue

A

dividends from government business enterprises & sale of government assets

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4
Q

3 types of tax systems

A

proportional : tax paid is a constant percentage of income

progressive : greater the income, greater the percentage of income paid to tax

regressive : greater the income, lesser the percentage of income paid to tax

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5
Q

adam smith’s principals of taxation

A

equity - rich should pay more tax than the poor

collection - low cost of collection

certainty - taxpayers know how much to pay & how it is calculated

convenience - minimal inconvenience to the taxpayer

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6
Q

current expenditures

A

goods & services for current use to directly satisfy the needs of the community (e.g. funding for schools)

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7
Q

capital expenditures

A

goods & services for future benefits (e.g. infrastructure investment)

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8
Q

transfer payments

A

transfers of money instead of goods & services (e.g. childcare subsidy)

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9
Q

discretionary (structural) fiscal policy

A

deliberate changes to the annual budget (taxation & government expenditure) to impact aggregate demand

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10
Q

budget surplus

A

revenue > expenditure (T > GE)

contractionary stance employed during an upturn/peak to dampen the economy

employed to pay government debt or fund future spending

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11
Q

budget deficit

A

expenditure > revenue (GE > T)

expansionary stance employed during a downturn/trough to stimulate the economy

funded by borrowing or sale of government assets

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12
Q

non-discretionary (cyclical) fiscal policy

A

automatic stabilizers which counterbalance changes in aggregate demand

e.g. progressive taxation

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13
Q

inflationary gap

A

production exceeds full employment - causing upward pressure on labour costs & prices

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14
Q

deflationary gap

A

production falls short of full employment - causing unemployment above NAIRU & downward pressure on prices

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15
Q

automatic stabilizers vs inflationary gaps

A

wage inflation > bracket creep (progressive taxation) > contractionary effect (↑T)

low unemployment > less welfare required > contractionary effect (↓GE)

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16
Q

automatic stabilizers vs deflationary gaps

A

low wages > lower proportion of income paid to tax (progressive taxation) > expansionary effect (↓T)

high unemployment > more welfare required > expansionary effect (↑GE)

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17
Q

limitations of automatic stabilizers

A

cannot eliminate peaks & troughs - but dampens the fluctuations

reactive to changes in income - not other factors which may affect aggregate demand

may slow recovery from recession - bracket creep constricts aggregate demand

18
Q

how can expansionary fiscal policy be financed ?

A

monetary financing (borrowing from the RBA) - printing more money may risk inflationary pressures

debt financing (selling government bonds) - does not increase money supply, but creates government debt

overseas financing (investors or institutions) - injection of foreign savings, but sovereign debt can be subject to unfavorable currency fluctuations

19
Q

crowding out

A

to fund budget deficit expenditure through debt financing, government bonds incentivize with competitive interest rates

∴ ↑ interest rates

∴ ↓ private investment

∵ cost of borrowing is greater

∴ ↓ effectiveness of expansionary fiscal policy

∵ ↑ G offset by ↓ I

20
Q

time lags of fiscal policy

A

inside lag : time it takes to recognize the need, decide which & implement countercyclical fiscal policy

outside lag : time it takes for fiscal policy to effect the economy (e.g. ↓ tax = ↑ disposable income = ↑ consumer confidence = ↑ consumer expenditure = ↑ aggregate demand)

21
Q

advantages & disadvantages of fiscal policy

A

+ : target specific sectors; discourage negative externalities through taxation; short time lag

  • : political constraints; debt vulnerable to global volatility; crowding out
22
Q

role of the RBA

A

govern monetary policy

foster financial stability (undertakes activities in financial markets)

banker to the Australian Government (issues Australian banknotes)

manage the payments system

23
Q

objectives of monetary policy

A

price stability (2-3% inflation)

full employment (4-5% unemployment)

sustainable economic growth (2-4% GDP)

24
Q

benefits of an inflation target for stakeholders

A

production sector : certainty (promotes investment); dampen inflationary/deflationary gaps

household sector : purchasing power (improves standards of living)

foreign sector : support exporters (competitiveness); encourage foreign investment

25
Q

impact of low interest rates on the four channels of monetary policy transmission

A

savings & investments channel : ↑ incentive to spend & borrow; ↓ incentive to save

cash flow channel : ↓ cost of borrowing; ↑ disposable income

asset prices & wealth channel : ↑ demand for assets; ↑ asset prices; ↑ wealth

exchange rate channel : ↓ AUD

26
Q

impact of high interest rates on the four channels of monetary policy transmission

A

savings & investments channel : ↓ incentive to spend & borrow; ↑ incentive to save

cash flow channel : ↑ cost of borrowing; ↓ disposable income

asset prices & wealth channel : ↓ demand for assets; ↓ asset prices; ↓ wealth

exchange rate channel : ↑ AUD

27
Q

how does the Reserve Bank of Australia dampen the economy ?

A

tighten monetary policy (contractionary stance) : sell government securities (bonds) to banks

∴ ↓money supply

∴ ↑cash rate

28
Q

how does the Reserve Bank of Australia stimulate the economy ?

A

ease monetary policy (expansionary stance) : buy matured government securities (bonds) from banks

∴ ↑money supply

∴ ↓cash rate

29
Q

impact of a cash rate increase on consumers (household sector)

A

↑interest rates; ↓consumption; ↓aggregate demand; ↓inflation

30
Q

impact of a cash rate increase on businesses (production sector)

A

↑interest rates; ↓investment; ↓aggregate demand; ↓inflation

31
Q

impact of a cash rate increase on the foreign sector

A

↑interest rates; ↑AUD; ↓aggregate demand; ↓inflation

32
Q

impact of a cash rate increase on economic objectives

A

positive : ↓inflation (∴ price stability)

negative : ↑unemployment (full employment); ↓aggregate demand (sustainable economic growth); ↓trade balance (external stability)

33
Q

advantages & disadvantages of monetary policy

A

+ : inflation target; high household debt makes consumers responsive; easy to implement

  • : long time lag; blunt transmission; minimal leeway to further reduce the cash rate
34
Q

microeconomic policy purpose

A

↑competition, efficiency (4), productivity

↑aggregate supply & production possibility curve

35
Q

microeconomic policy objectives

A

↑goods & services (sustainable economic growth)

↓CPI (∴ price stability)

↑rGDP (∴ full employment)

↑exports (∴ external stability)

36
Q

privatization

A

transfer of ownership & control from the government sector to the private sector

e.g. Qantas

37
Q

advantages & disadvantages of privatization

A

advantages : ↑competition & productivity; ↑productive efficiency; ↓government interference; ↓government debt

disadvantages : ↓allocative efficiency (∵ unprofitable goods & services are removed); ↑foreign ownership; ↑structural unemployment

38
Q

why some government businesses should not be privatized ?

A

public businesses have a social obligation

private businesses have a profit motive

e.g. police

39
Q

deregulation

A

removal of government control over a sector (∴ free market forces)

e.g. 2 airline policy

40
Q

advantages & disadvantages of deregulation

A

advantages : ↑productivity, efficiency & competition; ↑aggregate supply; ↓prices; ↓waste

disadvantages : businesses may collapse; short-term structural unemployment; negative externalities (e.g. removal of safety regulations)

eco 22 (4 decks)

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