Term 3: Macroeconomic Tools (Slides 3) Flashcards
what is macroeconomics?
study of the
national economy and
impacts of aggregate
demand
what is microeconomics?
study of individual
people and businesses
and the interaction of
those decisions in the
market
ORIGINS OF MACROECONOMICS - what did adam smith do?
- advocated MARKET
BASED ECONOMY with
free trade - market is free to set
prices/levels of activity
based on supply +
demand - theory that every
individual competing in
pursuit of their self-interest
makes us all better off
ORIGINS OF MACROECONOMICS - what did karl marx do?
- promoted socialist
economy, criticising
capitalism, causing
inequality - theory that
governments should
decide on distribution
of goods + services
ORIGINS OF MACROECONOMICS - what did john maynard keynes do?
- developed modern
macroeconomics with idea of
MIXED ECONOMY - keynes felt the great
depression was caused by
insufficient private spending - believed government
should increase its
spending and thereby
eliminate unemployment
AUSTRALIAS MIXED ECONOMY - what is our market based economy?
- market is free to set prices and levels of activity, based on supply + demand.
- criticised for causing inequality in social and economic circumstances, + environmental issues
AUSTRALIAS MIXED ECONOMY - what is our mixed economy?
- a system where individuals and businesses make their own decisions with degree of government involvement
- australia is a mixed economy, e.g;
setting interest rates and trade agreements - all modern economies are mixed, where means of production are shared between private and public sectors
AUSTRALIAS MIXED ECONOMY - what is the role of our government?
in our mixed economy, market economy provides freedom of choice, but government regulates some
aspects of the nature + level of economic activity for the
nation as a whole
what is monetary policy?
RBA sets interest rates
to affect amount of
savings/consumption/investment
what is fiscal policy?
government adjusts levels of government spending or taxes to
expand/contract circular flow of money
what does the government change/affect to achieve slow, manageable growth in the economy?
level of government spending
–> fiscal policy (government spending)
disposable income levels
–> fiscal policy (taxes)
levels of consumption vs savings
–> monetary policy
level of business investment
–> monetary policy
how does fiscal (budgetary) policy help regulate economic activity?
government spending + tax rates to monitor and influence a nation’s economy
affects government spending (g) and taxes (t)
how does monetary policy help regulate economic activity?
sets short term money lending market known as ‘cash rate’
basis of interest rates for lending and saving
means of controlling money supply of a country
affects (C), (S), and (I)
expansionary fiscal policy vs contractionary fiscal policy
expansionary - increased government spending, decrease in tax
contractionary - decrease in government spending, increased tax
what is direct tax?
what is indirect tax?
when does a deficit occur?
when taxes are insufficient to cover government spending in a financial year
taxes (t) - government spending (g) = deficit or surplus
a balanced budget is when they are equal
how does the government pay for deficits?
government bonds (local/foreign)
RBA
financial institutions
what is the objective of monetary policy?
manipulation of interest rates to alter cost, availability, and demand of borrowing money
interest rates have capacity to alter level of spending within economy, they help to achieve government’s goals of low inflation, strong + sustainable economic growth, and full employment
this improves australias living standards
what is the role of the reserve bank?
they’ve implemented monetary policy to help with;
stability of currency, full employment, inflation rate of 2%-3%, economic prosperity/welfare of australians
to monitor australian economy and set cash rate (meets on first tuesday of every month)
other responsibilities;
- issue australias bank notes
- influence amount of money available
in short term money market
- australias government bank
(payments + receipts)
- manages australias gold/foreign
exchange services
how does the RBA influence the flow of money/cash rate?
- changing interest rates by setting the cash rate
- influencing the cash rate by buying and selling AUD
- persuasion – influence on Australia’s lending activities
what is the cash rate?
where banks lend and borrow funds from each other overnight
the price of money in this market is the cash rate
the RBA sets a target for the cash rate, often referred to as the ‘instrument’ of monetary policy
used as basis for interest rates set by banks.
expansionary monetary policy
helps speed up the economy/ increase economic growth
contractionary monetary policy
helps slow down economic activity/growth
