Term 3: Macroeconomic Tools (Slides 3)

Question 1

what is macroeconomics?

Answer 1

study of the
national economy and
impacts of aggregate
demand

Question 2

what is microeconomics?

Answer 2

study of individual
people and businesses
and the interaction of
those decisions in the
market

Question 3

ORIGINS OF MACROECONOMICS - what did adam smith do?

Answer 3

• 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

Question 4

ORIGINS OF MACROECONOMICS - what did karl marx do?

Answer 4

• promoted socialist
  economy, criticising
  capitalism, causing
  inequality
• theory that
  governments should
  decide on distribution
  of goods + services

Question 5

ORIGINS OF MACROECONOMICS - what did john maynard keynes do?

Answer 5

• 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

Question 6

AUSTRALIAS MIXED ECONOMY - what is our market based economy?

Answer 6

• 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

Question 7

AUSTRALIAS MIXED ECONOMY - what is our mixed economy?

Answer 7

• 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

Question 8

AUSTRALIAS MIXED ECONOMY - what is the role of our government?

Answer 8

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

Question 9

what is monetary policy?

Answer 9

RBA sets interest rates
to affect amount of
savings/consumption/investment

Question 10

what is fiscal policy?

Answer 10

government adjusts levels of government spending or taxes to
expand/contract circular flow of money

Question 11

what does the government change/affect to achieve slow, manageable growth in the economy?

Answer 11

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

Question 12

how does fiscal (budgetary) policy help regulate economic activity?

Answer 12

government spending + tax rates to monitor and influence a nation’s economy

affects government spending (g) and taxes (t)

Question 13

how does monetary policy help regulate economic activity?

Answer 13

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)

Question 14

expansionary fiscal policy vs contractionary fiscal policy

Answer 14

expansionary - increased government spending, decrease in tax

contractionary - decrease in government spending, increased tax

Question 15

what is direct tax?

Question 16

what is indirect tax?

Question 17

when does a deficit occur?

Answer 17

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

Question 18

how does the government pay for deficits?

Answer 18

government bonds (local/foreign)
RBA
financial institutions

Question 19

what is the objective of monetary policy?

Answer 19

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

Question 20

what is the role of the reserve bank?

Answer 20

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

Question 21

how does the RBA influence the flow of money/cash rate?

Answer 21

• changing interest rates by setting the cash rate
• influencing the cash rate by buying and selling AUD
• persuasion – influence on Australia’s lending activities

Question 22

what is the cash rate?

Answer 22

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.

Question 23

expansionary monetary policy

Answer 23

helps speed up the economy/ increase economic growth

Question 24

contractionary monetary policy

Answer 24

helps slow down economic activity/growth