Monetary and Budgetary policy

Question 1

What is budgetary policy

Answer 1

budgetary policy is the anticipated changes in government expenditures and revenues over the coming year. It is decided once per year in may however the initiatives are not always introduced right away

Question 2

what is a progressive tax

Answer 2

a progressive tax is a tax in which the amount that can be taxed increases as the income of the person increases as well. An example of this is income tax

Question 3

what is a regressive tax

Answer 3

a regressive tax is a tax in which all people are taxed at an equal rate regardless of how much they make or are worth. This means a heavier tax burden is placed on lower income earners. An example of this type of tax is the GST

Question 4

What is a tax base

Answer 4

a tax base is how widely a tax is distributed amount the population (i.e. how many people are actually affected by this tax). Eg the luxury car tax has a far lower tax base than the GST.

Question 5

what is a tax mix

Answer 5

the tax mix is the percentage combination of indirect, direct and non tax revenue that makes up all current government revenue

Question 6

what is the difference between direct and indirect taxes

Answer 6

direct taxes are ones which are taken directly from the consumer and given to the government. Indirect taxes on the other hand are collected by a third party and then passed on to the government

Question 7

what are the three key principles of taxation and tax reform

Answer 7

1) simplicity
2) fairness
3) efficiency

Question 8

what is the headline budget balance

Answer 8

the headline budget balance is the balance that includes all volatile items that are included in the budget balance and usually makes the budget appear far nicer than it really is. Due to this it is pretty useless in the measure of the balance

Question 9

what is the underlying/fiscal budget balance

Answer 9

the underlying balance is the one that removes all volatile items which would normally be included in the budget calculations. This gives a more realistic representation of the state of the budget

Question 10

what is the largest revenue item in Australia

Answer 10

income tax

Question 11

what is the largest expenditure item in Australia

Answer 11

social security

Question 12

What is an automatic stabiliser

Answer 12

an automatic stabiliser is a stabiliser that is built into the budget so that it acts without intervention by the government. They act in a counter cynical way to smooth out the business cycle. An example is that social security payments naturally fall during a boom moving the economy towards a contractionary surplus

Question 13

what is a discretionary stabiliser

Answer 13

a discretionary stabiliser is any stabiliser that is introduced by the government in each year budget that is designed to smooth the business cycle when the automatic stabilisers fail and usually has a much more drastic effect. An example is cuts to company taxes

Question 14

What effect does Terms Of Trade have on on the budget outcome

Answer 14

the terms of trade affects business profits. With a lower terms of trade businesses make less so the government makes less money from collecting business tax. This decreases revenue

Question 15

How does the budget affect economic growth

Answer 15

the budget affects economic growth based on which stance the government is currently taking on the budget. If the budget is contractionary then economic growth is negatively affected (however this contraction is usually in response to extremely high growth in the first place). The opposite is true for an expansionary stance.

Question 16

how does the budget affect inflation rate

Answer 16

the budget affects the inflation rate in a similar way to how it affects economic growth. When the government takes a contractionary budgetary stance then it tends to put downwards pressure on our inflation rate and the reverse is true for an expansionary stance

Question 17

how does the budget affect full employment

Answer 17

full employment is not the main focus of budgetary policy except for specified policies such as the youth unemployment scheme however the governments stances in response to inflation and economic affects the goal employment. Higher growth tends to lead to higher full employment

Question 18

how does the budget affect external stability

Answer 18

the budget affects external stability by the level of total external government debt. If we have high external debt then we tend to worsen external stability. Due to this a contractionary stance tends to be better for external stability

Question 19

how does the budget affect equity

Answer 19

equity is directly linked to full employment so a stance that supports full employment also helps with the goal of equity

Question 20

economic policies that affect each goal

Answer 20

refer to the sheet printed out

Question 21

how can a budget deficit be funded

Answer 21

a budget deficit can be funded in three ways

1) selling government bonds overseas (i.e. increasing net foreign debt in order to fund debt)
2) borrow from the RBA (i.e. essentially asking the RBA to print more money)
3) borrowing from domestic markets (causes crowding out where there is less money floating around to use for business investment)

Question 22

What is monetary policy

Answer 22

monetary policy is the fine tuning of the budgetary that is controlled by the RBA and used once per month. It involves the manipulation of money within certain markets in order to have wide effects on interest and exchange rates

Question 23

what are the aims of monetary policy

Answer 23

the main aim of monetary policy is to maintain inflation at a stable rate within the 2-3% goal band. If this goal is achieved and easy to maintain then monetary policy can also be used to fine tune economic growth and full employment however this is not its main aim

Question 24

what is the recent trends in monetary policy

Answer 24

over the past few years post GFC recovery period the RBA has taken an expansionary stance in response to the slowing in the mining sector continuously lowering interest rates in an effort to stimulate growth

Question 25

what change does changing the cash rate have on growth

Answer 25

when the cash rate is changed it affects retail interest rates. This mostly affects mortgage holders as lower retail interest rates mean they have to repay less each month which stimulates growth as they spend this money elsewhere. The reverse is true if retail interest rates rise

Question 26

what change does changing the cash rate have on inflation

Answer 26

when the retail interest rates are lowered spending is stimulated which puts upwards pressure on inflation due to the increase in Aggregate demand. When they are raised it puts downward pressure on inflation as aggregate demand falls

Question 27

how does the RBA change the cash rate

Answer 27

the RBA changes the interest rates in a process called open market operations in which the RBA becomes a net buyer or seller in the overnight money market. If the RBA wanted to lower interest rates then it would enter the market and buy government bonds owned by the banks. This increases the amount of money in the overnight money market. Since a constant amount of money is required in the exchange settlement accounts the banks then withdraw it and send it into the real economy. With more money in the real economy interest rates fall.

Question 28

what is a dirty float

Answer 28

when there is a uniformed or erratic change in the exchange rate the RBA can help to stabilise it through the dirty float. The RBA becomes a net buyer or seller of Australian dollars (buying to stimulate demand when low and selling to increase supply when high)

Question 29

what is persuasion

Answer 29

persuasion is the third technique the RBA can use. If the RBA chooses to keep interest rates constant they can release projections saying that interest rates will fall or rise soon. if the interest rates are set to rise then people prepare in advance by placing more money in savings for higher repayments. This has a contractionary nature and the RBA didn’t actually do anything

Question 30

what are the transmission and how do they work

Answer 30

transmission channels are the ways the changes to the interest rates actually affect the real economy. There are three main channels.

1) Changes in credit sensitive spending
2) Higher comparative interest rates
3) Inflationary expectations

Question 31

what is credit sensitive spending

Answer 31

credit sensitive spending is spending based on the amount of money left over after paying monthly debts such as mortgage. If less money is left over then less spending occurs

Question 32

what is high comparative interest rates

Answer 32

Australia has higher interests rates than most overseas countries. Due to this we attract investors who wish to make a solid return on money stored (usually in super) when we drop our interest rates then they make less so not as many people invest in us. This lowers AD

Question 33

what is inflationary expectations

Answer 33

when the RBA cuts/raises or even releases projections then it tells businesses what the RBA is thinking on inflation rates. If the RBA thinks they will remain constant then businesses will not raise prices to maintain profit margins. This affects the real rate of inflation