Economic Policies and Management

Question 1

Benefits of EG

Answer 1

• increased standard of living for the population
• improved job prospects for the labour force
• opportunity for increased public investment in infrastructure and services such as education funded through higher government tax revenues

Question 2

What is NAIRU

Answer 2

refers to the level of unemployment at which there is no cyclical unemployment

Question 3

Benefits of maintaining full employment

Answer 3

• utilising an economy’s production capacity increasing standards of living and minimising adverse economic and social problems with unemployment

Question 4

Consequences of high inflation

Answer 4

• reduce the value of income and wealth
• reduce international competitiveness through rising production costs
• cause a depreciation on the AUD
• create uncertainty in the future
• distort the pattern of resource allocation

Question 5

AD formula

Answer 5

C + I + G + X - M

Question 6

What is fiscal policy

Answer 6

influences resource allocation, redistributes income and reduces the fluctuations of the business cycle

Question 7

3 ways to measure the budget outcome

Answer 7

1. Fiscal outcome – accurate long-term indicator recording revenue and expenses, not cash received
2. Underlying cash outcome – similar to fiscal outcome but uses cash method of accounting
3. Headline cash budget outcome – includes one off transactions (sale of gov. business)

Question 8

Changes in budget outcomes

Answer 8

o Discretionary – deliberate changes influence structural component of budget outcome

o Non-discretionary – changes due to changes in economic activity
o Automatic stabilisers – counter cyclical
1. Transfer payments
2. Progressive taxation system

Question 9

Stances of the budget changes

Answer 9

1. Expansionary stance: G > T increase in deficit
2. Contractionary stance: G < T decrease in deficit
3. Neutral

Question 10

Effects of budgetary changes on resource use

Answer 10

o Direct through gov. spending in particular area of economy

o Indirect through taxation and spending decisions to influence decreased consumption

Question 11

Effects of budgetary changes on income distribution

Answer 11

o Transfer payments

o Progressive taxation system

Question 12

Effects of budgetary changes on savings

Answer 12

 Budget deficit decreases national savings – gov. forced to borrow from private sector

Question 13

What is the crowding out effect

Answer 13

o With a depleted national savings pool, more competition for smaller savings pool leads to increased IR  more expensive to borrow funds domestically (CROWDING OUT EFFECT)
 Australia is an open economy – less effect compared to closed economy as private investors borrow from OS, increasing payments and primary income on CAD –> CAD deteriorates

Question 14

Methods of financing a deficit

Answer 14

o Borrowing from overseas – minimises the crowding out effect and stimulating growth, this adds to foreign debt with interest repayments recorded as debits on the net primary income account of the BOP

o Borrowing form RBA (monetary financing) – in effect this amounts to the government printing money in order to finance its expenditures, increases the money supply and inflation

o Selling assets – does not reduce the level of such underlying cash deficit or net operating deficit because these are adjusted to reflect one-off transactions like asset sales

Question 15

Impact of recent fiscal policy on EG

Answer 15

o Text book states that the stimulus package was the most successful ever, however, many suggest that it went too far and increased public debt (increased 2% to EG in 2009)

Question 16

Impact of recent fiscal policy on unemployment and workforce participation

Answer 16

o Unemployment closely related to the impacts of economic growth

o Impacts upon cyclical unemployment

o Increase in the tax-free threshold in 2013/13 budget influenced workforce participation

Question 17

Impact of recent fiscal policy on resource use

Answer 17

o Impact of the Carbon Tax as part of the Clean Energy Future Plan

o Renewable Energy Target aims to have 23% of power generated from renewable sources

Question 18

Impact of recent fiscal policy on national savings and CAD

Answer 18

o Surpluses lead to public savings and deficits lead to public dissaving’s or borrowings

o Government’s focus is to move to budget surpluses over the medium term to reduce public debt

o Budget deficits tend to lead to a bigger CAD (TWIN DEFICITS HYPOTHESIS)

Question 19

Impact of recent fiscal policy on distribution of income

Answer 19

o Reliance on automatic stabilisers to impact distribution of income

o NDIS introduced by Gillard

o Increase in superannuation from 9% to 12% by 2019

Question 20

What is monetary policy

Answer 20

conducted by the RBA to influence the cost and availability of money and credit in the economy

Question 21

What is tightening and loosening monetary policy

Answer 21

o Tightening – increase cash rate – contractionary

o Loosening – decrease cash rate – expansionary

Question 22

Purpose of monetary policy

Answer 22

• Stability of the economy (inflation target 2-3%)
• minimising fluctuations in the value of AUD
• maintain full employment
• sustained level of economic growth (target 3-4%)

Question 23

Impact of a decrease in interest rates on economic activity

Answer 23

o Encourages borrowing by both business and consumers

o Lower debt servicing costs increases disposable income and therefore spending

o Depreciation of the currency – less foreign investment due to lower returns

o Increase in aggregate demand

o Demand for money increases – RBA may increase money supply

Question 24

What is microeconomic policies

Answer 24

government action to improve resource allocation between firms and industries, in order to maximise output from scarce resources (KEY – greater competition – less regulation – greater productivity)

Question 25

What does micro policies encourage

Answer 25

encourages the efficient operations of product and factor markets through promoting structural change

Question 26

Aim of microeconomic policies

Answer 26

Aim of the reform: allocative efficiency, technical efficiency, dynamic efficiency and innovation

o Long term aim of increasing sustainable growth in Australia – addressing possible constraints

Question 27

Factors of constraint on micro

Answer 27

• lack of skilled workers
• inadequate infrastructure
• bottlenecks

Question 28

Difference between factor and product markets

Answer 28

Factor market is for any input into the production process including land, labour, capital and enterprise.

Product market is the interaction of demand for and supply of the outputs of production, that is, goods and services.

Question 29

Deregulation in the financial system

Answer 29

occurred 1980’s, floating of AUD, removal of direct control over banks, removal of foreign barriers entering the market and provided more competition

Question 30

Impacts of micro reform (short term costs)

Answer 30

• job losses
• withdrawal of subsidies
• manufacturing closures

Question 31

Impacts of micro reform (long term benefits)

Answer 31

o Achieve long term benefits of increased productivity growth from microeconomic reform

o Increase in economic output and lower unemployment

o Productivity commission stated that Australia’s GDP was 2.5% higher in 2006 due to the national competition policy reforms due to higher standards of living

o Lower inflation as a result of reforms – telecommunications dropped 50% since the 1990’s

Question 32

National competition policy

Answer 32

established in 1995, regulate access to infrastructure, practices made illegal (monopolisation, price discrimination, exclusive dealing and collusion)

Question 33

Future reforms: COAG

Answer 33

COAG have an agenda known as the seamless national economy and aims to harmonise rules and regulations between states. COAG improve productivity through regulatory reforms and competition with the aim to boost workforce participation through improvement in health and education policies (national health reform agenda 2011)

Question 34

Market-based policies

Answer 34

involves incentives and disincentives to influence the behaviour of households and businesses, essentially internalising negative externalities (reducing supply)

o Negative externality – market price is too low and too much is being produced

o To internalise the negative externality a tax can be implemented to add the social cost as a direct cost of production – carbon tax

Question 35

Target of environmental policies

Answer 35

long term policy targets to reduce carbon emissions 28% on 2005 level by 2030

Question 36

CITIES (international trade in endangered species)

Answer 36

(1976) aim was to ensure international trade specimens of wild animals and plants does not threaten survival – 5,800 species of animals protected, and 30,000 plants protected

Question 37

Vienna convention for the protection of the ozone layer

Answer 37

(1987) objective were for parties to promote cooperation by means of systematic observations, research and information exchange on the effects of human activities on the ozone layer and to adopt legislative or administrative measures against activities likely to have adverse effects on the ozone layer

Question 38

Enterprise agreements

Answer 38

formerly called collective agreements are negotiated collectively between an employer and employee, usually performed by a union

Question 39

Dispute resolution

Answer 39

occurs when employers or employees take action to disrupt the production process in order to highlight a disagreement between employers and employees (strikes, lockouts, work bans & closure)

Question 40

Forms of dispute resolution

Answer 40

1. Conciliation – tribunal helps to reach a mutual agreement, decision is not legally binding
2. Arbitration (rarely used) – tribunal makes a ruling that resolves a dispute and its legally binding

Question 41

When does the fair work commission intervene with dispute resolutions

Answer 41

1. Compulsory dispute settlement terms
   o Fair work act requires that awards and enterprise agreements have a formal process of dispute resolution included as a term of the agreement
   o In the case of a dispute, agreement may request for an independent third party to assist in resolution
2. Bargaining in good faith
   o Negotiations must abide by; participating in all meetings, disclosing relevant information, giving genuine consideration to all proposals and refrain from conduct that would undermine collective bargaining
3. Resolving industrial action
   o Industrial action permitted during negotiation
   o Fair work act only intervenes when; threat of significant harm to the economy or the population or industrial action has been going on for a long period of time

Question 42

Benefits of decentralised labour market

Answer 42

• high flexibility
• wages can change across firms and industries
• wages differ among individuals

Question 43

Negative effects of decentralised labour market

Answer 43

• greater income inequality

- no safety net for low income earners

Question 44

Education, training and employment programs

Answer 44

New education and training programs and reforms have been introduced during recent years with the goals of increasing productivity in the long term and increasing employment levels. Increase school retention rates to 90% by 2020 and raise the number of 25-34-year old with a university degree to 40% by 2025.