economic management Flashcards
direct tax
tax borne by the individual/firm on whom it is levied & cannot be passed on
indirect tax
tax on aspects of economic activity other than income & can be passed on
non-tax revenue
dividends from government business enterprises & sale of government assets
3 types of tax systems
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
adam smith’s principals of taxation
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
current expenditures
goods & services for current use to directly satisfy the needs of the community (e.g. funding for schools)
capital expenditures
goods & services for future benefits (e.g. infrastructure investment)
transfer payments
transfers of money instead of goods & services (e.g. childcare subsidy)
discretionary (structural) fiscal policy
deliberate changes to the annual budget (taxation & government expenditure) to impact aggregate demand
budget surplus
revenue > expenditure (T > GE)
contractionary stance employed during an upturn/peak to dampen the economy
employed to pay government debt or fund future spending
budget deficit
expenditure > revenue (GE > T)
expansionary stance employed during a downturn/trough to stimulate the economy
funded by borrowing or sale of government assets
non-discretionary (cyclical) fiscal policy
automatic stabilizers which counterbalance changes in aggregate demand
e.g. progressive taxation
inflationary gap
production exceeds full employment - causing upward pressure on labour costs & prices
deflationary gap
production falls short of full employment - causing unemployment above NAIRU & downward pressure on prices
automatic stabilizers vs inflationary gaps
wage inflation > bracket creep (progressive taxation) > contractionary effect (↑T)
low unemployment > less welfare required > contractionary effect (↓GE)
automatic stabilizers vs deflationary gaps
low wages > lower proportion of income paid to tax (progressive taxation) > expansionary effect (↓T)
high unemployment > more welfare required > expansionary effect (↑GE)
limitations of automatic stabilizers
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
how can expansionary fiscal policy be financed ?
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
crowding out
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
time lags of fiscal policy
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)
advantages & disadvantages of fiscal policy
+ : target specific sectors; discourage negative externalities through taxation; short time lag
- : political constraints; debt vulnerable to global volatility; crowding out
role of the RBA
govern monetary policy
foster financial stability (undertakes activities in financial markets)
banker to the Australian Government (issues Australian banknotes)
manage the payments system
objectives of monetary policy
price stability (2-3% inflation)
full employment (4-5% unemployment)
sustainable economic growth (2-4% GDP)
benefits of an inflation target for stakeholders
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
impact of low interest rates on the four channels of monetary policy transmission
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
impact of high interest rates on the four channels of monetary policy transmission
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
how does the Reserve Bank of Australia dampen the economy ?
tighten monetary policy (contractionary stance) : sell government securities (bonds) to banks
∴ ↓money supply
∴ ↑cash rate
how does the Reserve Bank of Australia stimulate the economy ?
ease monetary policy (expansionary stance) : buy matured government securities (bonds) from banks
∴ ↑money supply
∴ ↓cash rate
impact of a cash rate increase on consumers (household sector)
↑interest rates; ↓consumption; ↓aggregate demand; ↓inflation
impact of a cash rate increase on businesses (production sector)
↑interest rates; ↓investment; ↓aggregate demand; ↓inflation
impact of a cash rate increase on the foreign sector
↑interest rates; ↑AUD; ↓aggregate demand; ↓inflation
impact of a cash rate increase on economic objectives
positive : ↓inflation (∴ price stability)
negative : ↑unemployment (full employment); ↓aggregate demand (sustainable economic growth); ↓trade balance (external stability)
advantages & disadvantages of monetary policy
+ : inflation target; high household debt makes consumers responsive; easy to implement
- : long time lag; blunt transmission; minimal leeway to further reduce the cash rate
microeconomic policy purpose
↑competition, efficiency (4), productivity
↑aggregate supply & production possibility curve
microeconomic policy objectives
↑goods & services (sustainable economic growth)
↓CPI (∴ price stability)
↑rGDP (∴ full employment)
↑exports (∴ external stability)
privatization
transfer of ownership & control from the government sector to the private sector
e.g. Qantas
advantages & disadvantages of privatization
advantages : ↑competition & productivity; ↑productive efficiency; ↓government interference; ↓government debt
disadvantages : ↓allocative efficiency (∵ unprofitable goods & services are removed); ↑foreign ownership; ↑structural unemployment
why some government businesses should not be privatized ?
public businesses have a social obligation
private businesses have a profit motive
e.g. police
deregulation
removal of government control over a sector (∴ free market forces)
e.g. 2 airline policy
advantages & disadvantages of deregulation
advantages : ↑productivity, efficiency & competition; ↑aggregate supply; ↓prices; ↓waste
disadvantages : businesses may collapse; short-term structural unemployment; negative externalities (e.g. removal of safety regulations)
