economic policies Flashcards
what are the policy objectives of the RBA
- Price stability – RBA has followed the objective of keeping inflation between 2-3% on average over the course of the business cycle
- Economic growth – the achievement of rising living standards in the long term, along with management of the business cycle through monetary policy
- Full employment – means achieving the ‘natural’ rate of unemployment, which is currently thought to be about 4.5% of the workforce. At this level, cyclical unemployment would be close to 0
define economic growth
Economic growth is defined as the increasing capacity of the economy to satisfy the material wants of its members
how is EG measured and what is the target rate for it
- Measured by GDP
- The target rate is 3.25-3.5% p.a
how’s growth measured and what does it depen
- Potential growth is determined by growth in the labour force, and growth of productivity
- The actual rate of growth in any year, depends upon the level of aggregate demand at any point in time
why is growth important
- Growth is the key economic objective because it delivers higher real income and enables people to satisfy more wants
- Growth creates more demand for productive resources, including labour
- The extent to which growth helps achieve higher employment depends, on whether the growth rate exceeds the rate of growth of the population and workforce
issues with economic growth
- economic growth that is above 5% is unsustainable in a mature economy sit puts pressure on markets and it risks driving prices up.
- When growth is slow, there is insufficient demand to fully employ resources
Economic growth and COVID
- Prior to COVID, the Australian economy had recorded 26 consecutive years of economic growth
- The pandemic brought recession because of its dual impact on AD and AS
- It will also impact Australia’s long-term growth potential because it has reduced net migration and the natural rate of population increase
when does price stability occur
Price stability occurs when there is little change in the general price level
what is the target rate for price stability/inflation
2-3%
why is controlling inflation important
Controlling inflation is a very important economic objective, as sustained inflation rates above the upper end of the target range bring several economic costs
inflations relation to purchasing power of households income
inflation erodes the purchasing power of household incomes.
when inflation consumers can buy smaller quantities of goods and services
how does inflation impact interest rates
When prices rise, interest rates must follow otherwise lenders are paid in inflated dollars and they do not receive a positive rate of return
inflation and its relation to confidence
ersistent inflation erodes the confidence people have in money as a store of value
Inflation and its relation to investment
Business investment decisions are riskier in an inflationary environment, because rising costs and prices make it more difficult to determine a rate of return on investments
inflation and its relation to the rest of the world
- International competitiveness is eroded if domestic inflation exceeds those overseas
- Imports become more competitive in the domestic market as their prices fall relative to domestic prices
inflation rate and its relation to the exchange rate
- If our inflation rate was higher than that experienced overseas, we would predict currency depreciation because demand for our exports would fall
- BUT, depreciation means exports become more competitive and imports become more expensive
- The prices of imports rise, INFLATIONARY
- The net effect of depreciation on inflation depends upon the relative price elasticities of imports and exports
positives of inflation
- Sustained inflation may help to bring about structural changes in the economy
- The rising oil prices that led to cost-push inflation in the 1970s provided an incentive for companies to focus on energy efficiency and reducing fuel consumption
when does full employment occur
Full employment occurs when everyone who is willing and able to work can find a job
how much is the friction associated with a job take up of UE
responsible for approx. 1.5-2.5% of unemployment
when does structural unemployment occur
Structural unemployment occurs when there is a mismatch of available and required skills in a geographical or occupational sector of the economy. It accounts for 2-3% of the total unemployment rate
what is the natural rate of UE
4.5%
What are the other economic objectives
- Equitable distribution of income and welfare - can be achieved by achieving the other objectives.
- Efficient resource allocation
- Increasing productivity and efficiency
how are EG a d Full employment complementary
- Growth creates more demand for goods and services and therefore, the resources used in production
- Economic growth also improves material welfare, so aggregate demand will rise, providing stimulus to the expansion of output and employment
- Policies to achieve lower unemployment also promote growth
how are full employment and equitable income distribution complementary
Policies designed to lower unemployment should lead to a more equitable income distribution because work provides the income with which to consume, save and build wealth
how are price stability and economic growth complementary
Low inflation reduces uncertainty, which encourages investment in productive activities and promotes international competitiveness
