Module 4

Question 1

Economic objectives

Economic growth and quality of life

Answer 1

Economic Growth refers to change in a country’s real GDP over a period of time. It is measured through real GDP growth.
• Target: of 3 - 4% (the trend since the last 1991 recession)
Increases job prospects and living standards → increase in quality of life (QoL)
• Measured by HDI / GDP per capita
Achieved through increases in AD and/or AS.

Question 2

economic objectives

Full employment

Answer 2

● Full Employment is achieved when cyclical unemployment = 0 (i.e. there is no spare capacity in the economy)
○ It is measured through changes in the unemployment or underemployment rates.
○ Target: NAIRU - i.e. a rate of unemployment that does not cause the inflation rate to increase/accelerate.
The RBA estimates that the NAIRU target is 4 - 4.5%

Question 3

Economic objectives

price stability

Answer 3

● Inflation occurs when there is a sustained increase in the overall price level.
○ It is measured through changes in the headline or underlying inflation.
■ Underlying is a more accurate measure as it removes volatile items.
Target: 2 - 3% (inflation target by the RBA since 1993).

Question 4

Economic objectives

External stability

Answer 4

● External Stability refers to the ability of Australia to service its net foreign liabilities whilst shielding itself from external shocks.
○ It is measured through CAD/Net Foreign Debt/Net Foreign Liabilities as a Percentage of GDP, Terms of Trade (ToT), Exchange Rate.
Target: There is no specific target, however historically, the CAD should not exceed 6% of GDP.

Question 5

Economic objectives

Environmental stability

Answer 5

● Environmental Sustainability refers to the ability to achieve ecologically sustainable development (ESD)
○ - i.e. the ability to preserve the environment for future generations.
● It is measured through total carbon emissions/carbon emissions per capita.
Target: Set in international agreements - e.g. Paris Agreement to reduce carbon emissions to 26 - 28%of 2005 levels by 2030.

Question 6

Economic objectives

Distribution of income

Answer 6

● Distribution of Income and wealth refers to the extent to which income and wealth are equally distributed in an economy.
○ It is measured through changes in the Gini coefficient and shifts in the Lorenz Curve.
○ Target: An improvement in the Gini coefficient - a comparison should be made (e.g. gross income, previous years etc.)
The Australian Government’s progressive taxation - i.e. tax/transfer system - assists in improving income distribution.

Question 7

Distinguish between factor market and product market reforms

Answer 7

Factor market reforms are microeconomic reforms that reduce the cost and productivity of the factors of production (e.g., labour and capital) which are then indirectly passed on to consumers in the form of lower prices in all markets. However, product market reforms are microeconomic reforms which directly reduce prices charged to consumers in specific markets (eg. new competition in a monopoly market).

Question 8

Technical or productive efficiency

Answer 8

Technical or productive efficiency is achieved if firms use the least cost methods of production and are able to produce their output at minimum average cost.

Question 9

Allocative efficiency

Answer 9

Allocative efficiency is where firms charge prices which reflect the marginal cost of production so that
resources are allocated to produce goods

Question 10

Dynamic efficiency

Answer 10

Dynamic efficiency is achieved if firms respond to changes in consumer demand and technology over time so that they minimise costs of production.