Macroeconomic Objectives and Policies 8 (J) done Flashcards
5 economic objectives
- sustainable economic growth
- full employment
- price stablility
- equitable income distribution
- more efficient resource allocation
- sustainable economic growth
increase capacity of economy to increase standard of living.
- aim of sustainable rates that are non inflationary and resource efficient 3-4%
- full employment
a job for everybody that wants to and able to work
- approach NAIRU (non accelerating inflationary rate of unemployment) 4.5%
- full use of resources maximises capacity to produce and minimise the adverse economic and social problem of unemployment
- price stability
little or no sustained, appreciable rise in the general price level
- inflation at 2-3% on average over the economic cycle as high inflation reduces value of income, competitiveness, and causes uncertainty and loss of confidence
- equitable income distribution
balance of efficiency, rewards and incentives with fairness (equity)
- policies to reduce the gap between the wealthy and those in poverty is growing world wide
- reduce welfare dependancy
- a more efficient resource allocation
structural changes
- includes technical, allocative and dynamic
Technical efficiency
combining resources more productively
Allocative efficiency
minimising resource waste, sending resources to where they are most useful
Dynamic efficiency
ability to adapt and change over time
main role of macroeconomic policies
to stabilise large fluctuations in the business cycle. policies tend to influence level of AD
fiscal policy definition
a macroeconomic policy that implements government spending, taxation and the budget outcome to achieve management of the economy
main fiscal policy tool
Government annual budget
2 tools gov can use for fiscal policy
- automatic stabilisers
- discretionary measures
automatic stabilisers do not…
require any gov intervention to operate
what do automatic stabilisers do
boost aggregate demand during periods of recession and lower aggregate demand in a boom period when the economy expands
example of automatic stabilisers
progressive income tax
automatic stabilisers explanation
during a recession there are increased (welfare) claims on government spending which will increase injections, this will increase AD. hence economic growth is dampened
discretionary measures definition
the deliberate manipulation of government spending and/or taxation to achieve government economic objectives
discretionary measures example
building a major highway during a recession
explanation: increases injections into the economy and increase aggregate demand hence the economic low is dampened
monetary policy purpose
involves action by the RBA to influence the cost and availabiloty of money in the economy
RBA aims/objectives
- stability of Australia’s currency (inflation - 2-3%)
- reducing level of unemployment
- promoting a sustained level of economic growth (GDP)
what does transmission mechanism mean
changes in the interest rate impacts on other market rates and in turn, the components of AD
transmission mechanism steps
- RBA changes cash rate (interest rate)
- banks respond by changing rates on loans and deposits
- costs of borrowing and return on savings change
- changes in interest rates causes changes in exchange rates
- causes changes in consumption, net exports, investment
- changes in C + I + G + (X-M) causes changes in productivity and output and employment and economic growth
- changes in EG will effect - price of goods and services, wages and therefore inflation
fiscal policy uses which model
AE 45 degree model
monetary policy uses which model
AD/AS model
