The Role of Government in Australia Flashcards
How can the government reallocate resources? (x2)
- 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
What does taxation do?
- 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
What is a direct tax?
A tax paid by individuals and business firms which are levied
What is an indirect tax?
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
When do governments use indirect taxes? (x2)
- 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
Name the ways in which the government reallocates resources in the economy (x3)
- Taxation
- Spending
- Provision of goods and services
How does government spending reallocate resources?
They reallocate resources to a particular sector of the economy or to influence the decisions of consumers and businesses
What may the government provide which fits the community’s broader wants? (x4)
- 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
How does the government’s provision of goods and services achieve a better allocation of resources?
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.
How may the government redistribute income?
- Taxation
- Government spending (welfare payments and benefits)
How does government taxation help to reduce income?
It redistributes income by taxing individuals at different rates
What is the tax base?
The items that are taxed. The three main bases for the imposition of tax are income, wealth and consumption
What is the average rate of tax (ART)?
The proportion of total income earned that is paid in the form of tax
What is the marginal rate of tax?
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
What is progressive tax?
A tax where higher income earners pay a greater proportion of their income than lower income earners
What is regressive tax?
A tax where higher income earners would pay a lower proportion of their income than lower income earners
What is proportional tax?
A tax where all income earners pay the same proportion of their income as tax
What is the average rate of tax formula?
Tax payable/total income
How do social welfare payments help to distribute income?
They redistribute taxation revenue to low-income earners via social welfare payments which reduce income inequality.
Why does the government implement stabilisation policies?
To smooth out fluctuations in the business cycle, reducing periods of boom and recession resulting in a more even rate of growth
What is fiscal policy?
A macroeconomic policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle
What is monetary policy?
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
How is monetary policy administered?
The RBA administers monetary policy by influencing the level of interest rates
What are the instruments of fiscal policy? (x3)
- Government spending
- Taxation
- Budget outcome
What does fiscal policy involve?
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
Explain the main instrument of monetary policy
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
Name the government actions involved in the tight monetary policy stance (x2)
- Increasing interest rates
- Decreasing money supply
Name the impacts of a tight monetary policy stance (x5)
- Decreased demand for money
- Decreased consumer and investment spending
- Lower level of economic activity
- Reduced aggregate demand
- Rise in cyclical unemployment
Name the government actions involved in the loose monetary policy stance (x2)
- Decreasing interest rates
- Increasing money supply
Name the impacts of a loose monetary policy stance (x6)
- Increased demand for money
- Increased consumer and investment spending
- Higher level of economic activity
- Rise in aggregate demand
- Reduced cyclical unemployment
What does government competition policy do?
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
Name the ways the government achieves workable competition? (x2)
- Reducing barriers to entry
- Eliminating practices that restrict competition
What is the aim of the government’s consumer protection legislation?
It ensures fair business conduct by prohibiting practices that restrict competition and imposing penalties on firms that breach these guidelines
What does the government intervene with to protect the environment?
- 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
