EXTERNAL EXAM Flashcards
Sustainable Economic Growth
Rate of growth in consumption and business output which increases living standards and national income and can be maintained without producing adverse economic outcomes
Internal Stability
Government policy measures that seek to maintain stable prices for goods and services in an economy while achieving full employment within an economy
External Stability
government policy measures that help to ensure Australia meets its financial obligations with the rest of the world, key focus is maintaining a sustainable external debt position.
Improved standard of living
economy of a nation aims to maximise the quality of life: individual wellbeing according to their material living standards, health standards, education levels and literacy
Economic cycle
alternate between irregular periods of prosperity and recession in an economy.
boom
the phase of the trade cycle where the general level of economic activity is above average; characterised by full employment and inflationary pressures.
recession
phase of the trade cycle where the general level of economic activity is below to the economy’s current potential; characterised by: high unemployment, deflationary pressure and low business/consumer confidence
contraction
the slowing in aggregate output and income levels due to a rise in uncertainty
leading indicator
an indicator that provides information regarding changes in the economy before they occur in the economic cycle, eg: approvals to build houses
coincident indicator
an indicator that provides information regarding changes in the economy at the same time as they occur, eg: retail sales, new car regos.
lagging indicator
an indicator that provides information regarding changes in the economy after they occur, eg: CPI, unemployment and investment expenditure
Inflation
A general and progressive increase in the prices of goods and services that households buy
Inflation Rate
the percentage increase in the price level from one year to the next
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
GDP Deflator
shows how much a change in gpd relies on change of the price level
nominal GDP/real GDP x 100
Unemployment Rate
the percentage of the labor force that is unemployed
Unemployed
those in the labour force (over 15 years) who are not employed but are actively looking for employment
Frictional unemployment
people unemployed for a short period between jobs
structural unemployment
changes to the types and locations of jobs resulting in unemployment
cyclical unemployment
result in fluctuations in economic activity through phases of expansion and downturn
seasonal unemployment
seasonal nature of some occupations resulting in unemployment
Natural Unemployment Rate
The level of unemployment that exists when the economy is producing at the desired level of economic activity or potential GDP (highest level of GDP that can be maintained without inflation)
Long-term unemployment
Unemployed for longer than 52 weeks
Stagflation
a period of slow economic growth and high unemployment combined with price increase.
The Phillips Curve
a curve that shows the short-run trade-off between inflation and unemployment
Fiscal Policy
The means by which a government adjusts its spending levels and taxation rates to monitor and influence a nation’s economy
Budget
annual statement of the expected revenue and expenditure for the next financial year
Principles of Taxation
- equity: the rich should be taxed more than the poor.
- economy in collection: cost of tax collection is as low as possible
- quality of certainty: taxed individuals must known where tax applies, how much and how the tax rate is calculated
- quality of convenience: convenience for tax payer
Income Tax
A tax on people’s primary and secondary income
Company Tax
Direct tax on company profits at 30% for M/L companies and less for companies earning less than $10 million p.a.
Superannuation Tax
Compulsory contributions taxes at concessional rate of 15% and 30% for individuals earning more than $300,000
Goods and Services Tax (GST)
a broad-based tax of 10 per cent on the supply of most goods and services consumed in Australia
Petroleum resource tax
levied on profits of offshore oil and gas projects and all onshore oil and gas projects
Customs Duty
tax collected on goods that are imported
Excise Duty
tax on goods such as alcohol, petrol and tobacco
Proportional Tax
A tax in which the average tax rate is the same at all income levels.
Regressive Tax
A tax for which the percentage of income paid in taxes decreases as income increases
Indirect Taxation
GST, excise and customs duty, passed from manufacturer to consumer
Direct taxation
personal and company tax, levied on revenue
Fiscal Policy - Budget Deficit
Occurs when a government spends more than it receives in revenue in a financial year
Fiscal Policy - Budget Surplus
Occurs when a government saves more than it spends in a financial year. Can be used to pay down government debt
Discretionary Fiscal Policy
deliberate actions by policy makers in response to unacceptable levels of unemployment or a deflationary gap. Stimulation of aggregate demand by increasing government expenditure.
Cyclical (non-discretionary) Fiscal Policy
Elements of fiscal policy that automatically come into operation that couteract the inflationary or deflationary gaps - AUTOMATIC STABILISERS
e.g. during recession: increase government spending and budget deficits
Fiscal Policy and Deflationary Gap
As a result of economic downturn, aggregate demand curve falls, creating a deflationary gap in relation to the aggregate supply curve
Fiscal Policy and Inflationary Gap
As a result of economic boom, aggregate demand curve increases, creating an inflationary gap in relation to the aggregate supply curve
“Crowding Out Effect”
budget deficit absorbs funds in domestic savings pool
- dec available $
- inc intrest
- forces to borrow overseas
expansionary fiscal policy
- increase gov spending on G/S
- decrease in taxes
- to increase aggregate demand and expand output
contractionary fiscal policy
- decrease gov expenditure
- increase taxes
- to decrease aggregate demand or supply
- appropriate during inflation
autonomous expenditure lag
time it takes for a fiscal policy measure to cause changes in the components of aggregate demand
Monetary Policy
- Macroeconomic Policiy: Management of intrest rates by RBA to influence economic activity (to smooth out fluctuations).
- Expansionary : cut cash rate (stimulate econ)
- Contractionary: raise cash rate (dampen econ)
- Goal: promoting govts. economic objectives (price stability, full employemnt, economic welfare)
RBA’s Role
- conducts monetary policy to achieve its goals of price stability, full employment and economic prosperity
- uses an inflation targeting framework
- involves setting the interest rate on overnight loans (cash rate)
Inflation Target - Monetary Policy
RBA is obliged to apply monetary policy to keep inflation at 2-3% on average over the course of the economic cycle.
Keynesian Theory
Monetary policy is better suited to fighting ‘inflation’ and has advantages over contractionary fiscal policy
Headline Inflation rate
the inflation rate that includes all prices
Cash Rate
the interest rate that banks pay to borrow funds from other banks in the money market overnight.
Contractionary monetary policy
to fight inflation the monetary policy;
- increases intrest rates
- discourages spending
- encourage savings and investment
- reduces AD (shift left)
con: inc unemployment
expansionary monetary policy
to grow economy in times of economic recession;
- decrease intrest rates
- decrease cost of borrowing money (encourage borrowing $)
- encourages spending and investment
- discourages saving
- Boost AD (shift right)
Con: risk high inflation
Monetary Policy Transmission: Savings and investment channel
Low interest rate: encourage spending and borrowing
high interest rates: encourage saving
Monetary Policy Transmission: Cash-flow channel
low interest rates - increased cash-flow to households and businesses, decreasing debt servicing
high interest rates = decrease cash flow to businesses/households
Monetary Policy Transmission: Asset prices and wealth channel
low interest rates: encourage asset purchases
high interest rates: discourage asset purchases
Monetary Policy Transmission: exchange-rate channel
low interest rates: encourage capital outflow and discourage capital inflow
high interest rates: encourage capital inflow and discourage capital outflow
The Transmission Mechanism
Tracks the way a change in a cash rate spreads through the economy to influence that level of economic activity, employment and inflation.
- change in cash rate changes interest rates and changes in interest rates affecting economic activity and inflation.
Paradox of Thrift
Increased savings represents a diminishing of the circular flow of income; as everyone tries to save an increasingly larger portion of their incomes, the nation becomes poorer instead of richer
economic growth
the sustained increase in the productive capacity of an economy over a specific time period
Real GDP
inflation-adjusted measure that reflects the value of goods and services produced by an economy in a given year: “constant price”, “inflation corrected”
nominal GDP
not adjusted to inflation, used to compare quarterly output
aggregate demand
the amount of goods and services in the economy that will be purchased at all possible price levels
aggregate supply
the total amount of goods and services in the economy available at all possible price levels
Keynesian Economic Theory
The most important driver of economic growth is the total expenditure in the economy, derived from increasing the level of aggregate demand.
Positive Demand Shocks
- sudden inc in demand
- cause a shortage
- drive up price
- dec unemployment
- causes an inc AD in economy
Negative Demand Shocks
- sudden dec in demand
- oversupply = dec in prices
- Dec AD in economy
- inc unemployment
Positive Supply Shocks
- unexpected event that inc output
- cause price to dec
- inc AS (shift right)
e.g. a favorable growing season for a vegetable like corn.
Negative Supply Shocks
- unexpected event that dec supply
- output dec = price inc
- AS dec (shift left)
e.g. A natural disaster, such as a hurricane or earthquake, can temporarily create negative supply shocks.
microeconomic policy
Economic policy which affects smaller sectors of the economy, aiming to make them more productive or efficient
Aim of Microeconomic Policy
- increase the efficiency of resource allocation
- raise productivity
- inc production of output (aus producers)
Making Aus more internationally competitive by inc supply of G+S and dec prices to meet domestic and export demand.
Headline Rate of Inflation?
The percentage change in prices overtime, as measured by the CPI; also referred to as the ‘consumer inflation rate’.
Marginal Costs
The cost of producing one more unit of output.
Advantages of Microeconomic Reforms?
- Greater market competition (inflation, product innovation, innovation in production)
- greater consumer sovereignty
- inc resource efficiency
- reductions in regulations, flexibility makes it easier to adjust to changing economic conditions
- improved import and export competitiveness
- greater job creation
- greater consumption possibilities.
Disadvantages of Microevolution Reforms?
- Dislocation/ disruption period for the adjustments
- time lag (take time to plan and introduce) - difficult for government to propose, plan and introduce in a single election cycle
- Benefits may not be experienced equitably.
- Structural unemployment (short term).
- Added costs or re-training and welfare payments.
- Reform fatigue
- Possible conflict between the three levels of government jurisdiction.
deflationary pressures
imply a fall in aggregate demand. This leads to a lower rate of growth or a fall in GDP and consequently a lower inflation rate.
inflationary pressures
If aggregate supply falls but aggregate demand remains unchanged, there is upward pressure on prices and inflation
tax bracket creep
inflation pushes individuals incomes higher,which puts them in higher tax bracket
tax base
the total value of all of the assets, income, and economic activity that can be taxed by a taxing authority, usually a government
