(t4) policy responses and their effects in dealing with the economic objectives Flashcards
define macroeconomic policies
policies that affect the economy as a whole with the aim of minimising fluctuations in the business cycle. also referred to as DEMAND MANAGEMENT policies
What are the three main limitations of economic policy?
Time lags, political constraints, and global influences
What are the two types of time lags
Implementation time lags and impact time lags
What are implementation time lags?
When it takes time for the government to make changes to or introduce new economic policies
What are impact time lags?
When it takes time for a new policy or a policy change to have an impact on the economy
What is the implementation and impact time lag for fiscal policy?
Implementation: medium term (annual budget)
Impact: short term (a few months)
What is the implementation and impact time lag of monetary policy?
Implementation: short term (monthly RBA meeting)
Impact: medium term (6 - 18 months)
What is the implementation and impact time lag of microeconomic reform?
Implementation: long term (a few years )
Impact: long term (up to 20 years)
When is fiscal policy important and why?
Fiscal policy becomes important during a downtown due to its shorter impact time lag, making it the most effective policy to achieve an immediate boost in AD
What are political constraints?
In the year before an election govts are under pressure to implement policies that are popular with the electorate but may not have long-term economic benefits
Why does fast domestic growth cause an increase in imports while export growth weakens?
Increased domestic demand for foreign goods (imports rise), rising wages & production costs (exports weaken, become less attractive, less competitive), stronger domestic currency (cheaper imports)
