Exam revision

Question 1

Who is responsible for monetary policy in Australia

Answer 1

Reserve bank of australia

Question 2

Aim of RBA?

Answer 2

Mandated to control inflation (they primarily focus on this).
Aims to keep inflation low and this allows for price stability.

Question 3

4 tools available to the RBA - what does Targeting cash rate do?

Answer 3

It is the principle tool used in australia.
It is the interest rate that other banks borrow and lend with the RBA.
A change in the TCR should filter through to commercial banks.

Question 4

4 Tools available to the RBA - what does Open Market Operations do?

Answer 4

This is the buying and selling on government bonds.

When the RBA buys the bonds from the public they are increasing the money supply.

Question 5

How is a change to the TCR considered in Australia?

Answer 5

The RBA uses the taylor rule.

However, before changing they consider the state of the economy - GDP / unemployment and inflation.

Question 6

If output (GDP) is below potential - using the taylor rule, what should the RBA do?

Answer 6

Potential GDP - actual GDP:

Implement loose policy - reduce Target cash rate

Question 7

If inflation is above potential using the taylor rule, what should the RBA do?

Answer 7

Potential inflation - actual inflation:

Implement tight policy - increase Target cash rate.

Question 8

What is an unconventional measure the RBA can use to stimulate the economy?

Answer 8

Quantitative easing - buying government bonds from the public.

This stimulates money flow
The banking sector should have more deposits, which enables lending and stimulates aggregated demand (GDP)

Question 9

What was Keynes prescription to fixing an economy in recession, and what affects do injections and leakages have?

Answer 9

1. Calculate GDP gap
2. GDP gap / multiplier = how much the gov should spend.

Injections increase the multiplier affect.
Leakages decrease the multiplier affect.

Question 10

What are the difficulties associated with calculating the multiplier?

Answer 10

1. Delays (lags) in obtaining accurate GDP data.
2. Marginal propensity to consume, import and marginal tax rate will vary and therefore difficult to estimate.
3. Difficult to measure what affect the increased spending will have on interest rates, inflation and other sectors.
4. Implement government spending takes time (legislative process and allocation).

Question 11

Where does extra government spending come from?

Answer 11

1. Increased taxation
2. Borrowing through selling government bonds
3. Printing money

Question 12

Negative impact on increasing government revenue through taxation?

Answer 12

During a recession increasing taxes will not stimulate the economy, as it will limit consumption and investment further.

Question 13

Negative impact on increasing government revenue through borrowing?

Answer 13

Could increase interest rates (increase demand for credit, will limit credit available) and crowds out the private sector. Private sector less able or likely to invest.

Question 14

Negative impact on increasing government revenue through printing money?

Answer 14

Can increase inflationary pressure. With the increase of money supply in the economy, more money available = higher demand for products - which increases prices.

Question 15

Future impacts of high levels of government debt with the measures to reduce it?

Answer 15

1. Higher taxes - will reduce GDP. GDP is the bases for taxation.
2. Reduced government spending - less public servants and infrastructure projects.
3. Problems paying unfunded liabilities (pensions).
4. Could default on its debt.

Question 16

What would cause a shift in the demand curve?

Answer 16

When something affects the consumer:

1. Change in income level
2. Change in taste.
3. Change in substitute or complement goods.
4. Future price change / tax
5. Promotion of goods

Question 17

What causes a shift in the supply curve?

Answer 17

When something affects the supplier

1. Change to price of inputs in production (i.e. labour, materials, energy).
2. Innovation in technology or management practices
3. Natural or man-made disasters
4. Regulations

Question 18

What is a price ceiling and how does it affect the supply and demand curve?

Answer 18

Government intervention which determines the maximum price (lower than E*)

Decrease supply / Increase demand

Equals a shortage - leading to black market

Causes a DWL - loss in economic welfare due to loss in CS and PS

Question 19

What is a price floor and how does it affect the supply and demand curve?

Answer 19

Government intervention which determines the minimum price (higher than E*)

Increase supply / decreases demand

Equals an excess supply - which government might need to buy.

Cost to taxpayer - all sections of the diagram between Qd and Qs

Question 20

Why would the government impose taxes of goods and what impact does it have on the supply and demand curve?

Answer 20

2 reasons - 1) raise revenue 2) reduce consumer consumption.

Both seller and buyer will be required to pay some of the tax (depends on how steep the demand curve is).

Supply curve will shift UPWARD (s + t)

Elasticity of the product will affect supply and demand.

Question 21

What impacts the loanable fund market and what affects the supply and demand?

Answer 21

Y axis = interest rate / x axis = value of the load

Supply of loans are driven by savings (more savings - shift to right / less saving - shift to left)

Demand of loans is driven by investment/borrowing (More investment - shift to right / less investment - shift to left).

Question 22

What impacts the bond market and what affects does it have on the supply and demand curve?

Answer 22

Demand driven by investment, banks, public

Supply driven by government (fixed supply - vertical line)

Inverse relationship between bond price and yield (demand increase = price increase & yield decrease / demand decrease = price decrease & yield increase)

Question 23

What impacts the labour market and what affects does it have on supply and demand?

Answer 23

Y-axis = wage rate / x axis = quantity of labour.

Supply - employees
Demand - employers

Demand increase - wages DO NOT adjust (sticky).
Qs > Qd = unemployment.

Question 24

What are the rigidities in the labour market, which stops wages from going down.

Answer 24

1. Generosity of the unemployment benefits
2. Disincentive effects of tax structure
3. Minimum wage
4. Unions

Question 25

What is income distribution and why do governments intervene?

Answer 25

Income distribution is an attempt to make income more equitable through the progressive tax structure and welfare payments.

Question 26

What is the lorenz curve and how is it used?

Answer 26

Represents income inequality through a graph.

Plots cumulative proportion of populations against cumulative proportion of income.

Further away from the 45* line the more income is unequally distributed.

Question 27

What is the Gini Coefficient and how is it used?

Answer 27

Is a measurement that determines the income distribution.

Closer to 1 = income distribution less equal
Closer to 0 = income distribution more equal.

Question 28

What is asymmetrical information and how does government intervene to fix market failure?

Answer 28

It is when one party has more information than another and uses it to their advantage.

Government use consumer law.

a) Setting standards - specify product or service should have certain standards.
b) Improve information - give consumers more information

Question 29

What is externality and how does government intervene to fix market failure?

Answer 29

External effects - cost or benefit to someone who was not involved in the transactions but affected.

Government fix negative externalities - nothing/prohibit or tax

Government rewards for positive externalities - subsidies.

Question 30

What is a public good and why does the government create?

Answer 30

To be a public good something must be:

1) non-rival (you consume, but it is still available for someone else)
2) non-excludable (no one can be stopped form using - it is free).

Government produces public goods because there is no charge so no one will produce.

Question 31

What does the term absolute advantage mean?

Answer 31

When a country can produce a product more efficiently, using fewer resources (labour).

Question 32

What does the term comparative advantage mean?

Answer 32

When a country can produce a good with a lower opportunity cost (they give up less). This is the basis for trade as resources are scarce.

Question 33

How to determine the comparative advantage?

Answer 33

1. Calculate opportunity cost (loss / gain)

2. The country with the lowest opportunity cost has the comparative advantage.

Question 34

What is a tariff ?

Answer 34

A tariff is a government intervention by applying trade barriers, in the form of a tax on goods imported into the country and result in DWL.

Question 35

What are other types of restrictions on trade?

Answer 35

1. Voluntary export restraint
2. Production subsidies
3. Export subsidies
4. Discriminatory government procurement
5. Quotas
6. Embargos

Question 36

Economic reasons for applying trade restrictions

Answer 36

Infant industry