economic policies

Question 1

what are the policy objectives of the RBA

Answer 1

• 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

Question 2

define economic growth

Answer 2

Economic growth is defined as the increasing capacity of the economy to satisfy the material wants of its members

Question 3

how is EG measured and what is the target rate for it

Answer 3

• Measured by GDP

- The target rate is 3.25-3.5% p.a

Question 4

how’s growth measured and what does it depen

Answer 4

• 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

Question 5

why is growth important

Answer 5

• 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

Question 6

issues with economic growth

Answer 6

• 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

Question 7

Economic growth and COVID

Answer 7

• 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

Question 8

when does price stability occur

Answer 8

Price stability occurs when there is little change in the general price level

Question 9

what is the target rate for price stability/inflation

Answer 9

2-3%

Question 10

why is controlling inflation important

Answer 10

Controlling inflation is a very important economic objective, as sustained inflation rates above the upper end of the target range bring several economic costs

Question 11

inflations relation to purchasing power of households income

Answer 11

inflation erodes the purchasing power of household incomes.

when inflation consumers can buy smaller quantities of goods and services

Question 12

how does inflation impact interest rates

Answer 12

When prices rise, interest rates must follow otherwise lenders are paid in inflated dollars and they do not receive a positive rate of return

Question 13

inflation and its relation to confidence

Answer 13

ersistent inflation erodes the confidence people have in money as a store of value

Question 14

Inflation and its relation to investment

Answer 14

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

Question 15

inflation and its relation to the rest of the world

Answer 15

• 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

Question 16

inflation rate and its relation to the exchange rate

Answer 16

• 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

Question 17

positives of inflation

Answer 17

• 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

Question 18

when does full employment occur

Answer 18

Full employment occurs when everyone who is willing and able to work can find a job

Question 19

how much is the friction associated with a job take up of UE

Answer 19

responsible for approx. 1.5-2.5% of unemployment

Question 20

when does structural unemployment occur

Answer 20

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

Question 21

what is the natural rate of UE

Answer 21

4.5%

Question 22

What are the other economic objectives

Answer 22

• Equitable distribution of income and welfare - can be achieved by achieving the other objectives.
• Efficient resource allocation
• Increasing productivity and efficiency

Question 23

how are EG a d Full employment complementary

Answer 23

• 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

Question 24

how are full employment and equitable income distribution complementary

Answer 24

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

Question 25

how are price stability and economic growth complementary

Answer 25

Low inflation reduces uncertainty, which encourages investment in productive activities and promotes international competitiveness