macroeconomic policies

Question 1

macroeconomic policy

Answer 1

the use of government policies to reduce large fluctuations in the business cycle and stabilise economic activity to achieve economic objectives

Question 2

fiscal policy

Answer 2

involves the government using spending, taxation and the budget outcome to influence resource allocation, redistribute income and reduce fluctuations in economic activity

Question 3

budget outcomes

Answer 3

deficit (expenditure > revenue)
surplus (expenditure < revenue)
balanced (expenditure = revenue)

Question 4

budget stance

Answer 4

refer to the spending patterns of the government

expansionary (net increase in government spending)
contractionary (net decrease in government expenditure)

Question 5

automatic stabilisers

Answer 5

instruments inherent in the government budget that counterbalace economic activity

Question 6

structural vs cyclical components of the budget

Answer 6

cyclical components are a result of changes in economic activity while the structural components are deliberate changes to the budget

Question 7

three main ways to finance a budget deficit

Answer 7

borrowing from the private sector
borrowing from the RBA
borrowing from overseas

Question 8

borrowing from the private sectors

Answer 8

involves selling treasury bonds to raise funds. may lead to crowding out effect where money supply falls, putting upward pressure on interest rates

Question 9

borrowing from the RBA

Answer 9

quantitative easing or monetary financing increases supply through the government selling securities to the RBA, increasing their cash flow. this increases the supply of money and usually is only used when the cash rate is very low. may lead to currency devaluation and may lead to inflation

Question 10

borrowing from overseas

Answer 10

the RBA can sell government securities to foreign investors, then credit the Australian-dollar-equivalent of the loan to the government’s account

Question 11

ways for a government to use a budget surplus

Answer 11

pay off public debt
pay off foreign debt
place into a government owned investment fund such as The Future Fund

Question 12

benefit of fiscal policy

Answer 12

can be used to target specific areas of the economy

Question 13

limitations of fiscal policy

Answer 13

time lags including recognition time lag, implementation time lag and impact time lag
political considerations
CAD and foreign debt
conflicting economic objectives

Question 14

fiscal policy response to the GFC

Answer 14

income tax decreased by 12% and unemployment benefits increased by 40%
the government implemented a $60 billion stimulus package including $900 cash grants and expenditure on infrastructure

Question 15

monetary policy

Answer 15

management of interest rates by the RBA in order to influence economic activity

Question 16

main objectives of monetary policy

Answer 16

price stability (2-3% inflation)
full employment
economic growth

Question 17

process of lowering interest rates

Answer 17

the RBA undertakes the buying back of government securities, therefore increasing the supply of cash in the money market and lowering the cash rate
The RBA buys government securities/bonds from financial institutions, transferring cash to the banks exchange settlement accounts

Question 18

process of increasing interest rates

Answer 18

the RBA undertakes the sale of government securities, lowering the supply of cash in the money market and lifting the cash rate
financial institutions transfer cash to the RBA, decreasing the supply of cash in the exchange settlement accounts

Question 19

monetary policy response to the GFC

Answer 19

cash rate fell from 7.25% to 3%

Question 20

benefits of monetary policy

Answer 20

short implementation time lag
implemented independently of the government so there is no political bias
works better at halting aggregate demand than stimulating it

Question 21

limitations of monetary policy

Answer 21

long impact time lags
expansionary monetary policy may not lead to extra demand if there is limited confidence
some people see low interest rates as a sign of a weak economy, reducing consumer confidence
unable to target particular areas of the economy
external shocks can make it less effective
undermined by fiscal policy