The Role of Government in Australia

Question 1

How can the government reallocate resources? (x2)

Answer 1

• By influencing the way consumers and businesses behave in the market through taxation and spending measures
• By producing goods and services itself e.g. public goods

Question 2

What does taxation do?

Answer 2

• Raises revenue to allow for government spending
• Taxes and charges on producers can also be used to influence the prices of goods and services, influencing the price of goods and services

Question 3

What is a direct tax?

Answer 3

A tax paid by individuals and business firms which are levied

Question 4

What is an indirect tax?

Answer 4

Taxes that are levied on individuals and business firms but they can be passed on to someone else. It is attached to a good or service rather than to an individual or company

Question 5

When do governments use indirect taxes? (x2)

Answer 5

• They divert resources away from the production of such goods e.g. high prices on cigarettes deter people from smoking and encourage smokers to quit.
• They also reflect higher health care costs associated with smokers who have a much more likelihood of several diseases

Question 6

Name the ways in which the government reallocates resources in the economy (x3)

Answer 6

• Taxation
• Spending
• Provision of goods and services

Question 7

How does government spending reallocate resources?

Answer 7

They reallocate resources to a particular sector of the economy or to influence the decisions of consumers and businesses

Question 8

What may the government provide which fits the community’s broader wants? (x4)

Answer 8

• Funding for the arts which may otherwise be unprofitable
• Grants for start-up businesses or new growth industries that without a proven track record might lack access to finance
• Subsidies for telecommunications companies such as Telstra to provide broadband services in regional areas where these services would not be profitable
• Cash payments to private employment search businesses, which find jobs for unemployed people

Question 9

How does the government’s provision of goods and services achieve a better allocation of resources?

Answer 9

Governments may directly involve themselves in the production process to achieve a better allocation of resources, providing a substantial amount of basic infrastructure such as roads, railways, public transport, electricity etc.

Question 10

How may the government redistribute income?

Answer 10

• Taxation

- Government spending (welfare payments and benefits)

Question 11

How does government taxation help to reduce income?

Answer 11

It redistributes income by taxing individuals at different rates

Question 12

What is the tax base?

Answer 12

The items that are taxed. The three main bases for the imposition of tax are income, wealth and consumption

Question 13

What is the average rate of tax (ART)?

Answer 13

The proportion of total income earned that is paid in the form of tax

Question 14

What is the marginal rate of tax?

Answer 14

The proportion of any increase that must be paid as tax, representing how many cents in each extra dollar earned that must be paid as government

Question 15

What is progressive tax?

Answer 15

A tax where higher income earners pay a greater proportion of their income than lower income earners

Question 16

What is regressive tax?

Answer 16

A tax where higher income earners would pay a lower proportion of their income than lower income earners

Question 17

What is proportional tax?

Answer 17

A tax where all income earners pay the same proportion of their income as tax

Question 18

What is the average rate of tax formula?

Answer 18

Tax payable/total income

Question 19

How do social welfare payments help to distribute income?

Answer 19

They redistribute taxation revenue to low-income earners via social welfare payments which reduce income inequality.

Question 20

Why does the government implement stabilisation policies?

Answer 20

To smooth out fluctuations in the business cycle, reducing periods of boom and recession resulting in a more even rate of growth

Question 21

What is fiscal policy?

Answer 21

A macroeconomic policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle

Question 22

What is monetary policy?

Answer 22

A macroeconomic policy that aims to influence the cost and supply of money in the economy in order to influence outcomes such as economic growth and inflation

Question 23

How is monetary policy administered?

Answer 23

The RBA administers monetary policy by influencing the level of interest rates

Question 24

What are the instruments of fiscal policy? (x3)

Answer 24

• Government spending
• Taxation
• Budget outcome

Question 25

What does fiscal policy involve?

Answer 25

It involves altering the level of government spending and taxation in order to alter the level of spending in the economy and the income circulating around the economy

Question 26

Explain the main instrument of monetary policy

Answer 26

The main instrument of monetary policy is the use of domestic market operations which involves the buying and selling of government securities by the RBA in order to affect the cash rate in the short term money market and influence the level of interest rates in the economy

Question 27

Name the government actions involved in the tight monetary policy stance (x2)

Answer 27

• Increasing interest rates

- Decreasing money supply

Question 28

Name the impacts of a tight monetary policy stance (x5)

Answer 28

• Decreased demand for money
• Decreased consumer and investment spending
• Lower level of economic activity
• Reduced aggregate demand
• Rise in cyclical unemployment

Question 29

Name the government actions involved in the loose monetary policy stance (x2)

Answer 29

• Decreasing interest rates

- Increasing money supply

Question 30

Name the impacts of a loose monetary policy stance (x6)

Answer 30

• Increased demand for money
• Increased consumer and investment spending
• Higher level of economic activity
• Rise in aggregate demand
• Reduced cyclical unemployment

Question 31

What does government competition policy do?

Answer 31

It ensures competition in markets is aimed at ensuring long term gains for consumers and the economy as a result of:

• Ensuring efficient use of resources
• Lower costs of production
• Increased product innovation
• Lower prices for consumers

Question 32

Name the ways the government achieves workable competition? (x2)

Answer 32

• Reducing barriers to entry

- Eliminating practices that restrict competition

Question 33

What is the aim of the government’s consumer protection legislation?

Answer 33

It ensures fair business conduct by prohibiting practices that restrict competition and imposing penalties on firms that breach these guidelines

Question 34

What does the government intervene with to protect the environment?

Answer 34

• Managing the use of non-renewable resources and promoting the use of renewable resources through government incentives and legislation
• Limiting or accounting for externalities through taxes