Topic 4: Economic Policies and Management Flashcards
economic objectives
- economic growth
- full employment
- price stability
- external stability
- environmental stability
- distribution of income
economic growth objective
Sustainable growth
3-4% per year
full employment objective
NAIRU
No cyclical unemployment
Production is maximised, prices are minimised
price stability objective
2-3% inflation rate
external stability objective
Government must be able to meet its long-term financial obligations
environmental sustainability objective
Ecologically sustainable development
distribution of income objective
More equitable distribution of income
conflicts between economic objectives
Price stability and full employment Economic growth and environmental sustainability Economic growth and income distribution Economic growth and external stability Full employment and external stability
purpose of macroeconomic policies
In general, macroeconomic policies work to smooth out fluctuations in the business cycle
fiscal policy
The macroeconomic policy used by the government to influence the economy
Redistribution of income
Reallocation of resources
Merit goods
Reduce fluctuations in the business cycle
The budget is a record of all the planned spending and revenue for the forthcoming financial year
budget revenue
Direct taxes
Indirect taxes
Sale of public assets
Operation of enterprises
budget expenditure
Welfare system Health Education Transport defence
budget outcomes and stances
Surplus
Deficit
Balanced
Expansionary
Contractionary
Neutral
Factors that Affect the Budget Outcome
Discretionary (structural)
-Planned spending and revenue measures decided on by the budget and recorded in the budget
Non-Discretionary (cyclical)
-Changes in expenditure and revenue that arise due to changes in the business cycle, changes in automatic stabilisers
Automatic stabilisers: features of fiscal policy that act to offset changes in economic activity
Managing a budget surplus
Pay off debt
Likely to stimulate consumption and investment if they’re paying domestic investors
If overseas, this will help external stability
Deposit with RBA
Special Wealth Fund
The Future Fund (2006)
Building Australia Fund (2009)
Managing a budget deficit
Borrow from RBA (monetary financing) Printing money - can lead to inflation Borrow Domestically (debt financing) Sale of government bonds Can cause crowding out Absorbs funds from domestic market meaning people are forced to borrow from overseas Unlikely to occur in economic downturns Borrow Overseas Worsens external stability Sale of Publicly Owned Assets (privatisation) Syd Kingsford Smith Airport Telstra
benefits of fiscal policy
Specific targeting to certain areas of the economy
Supply Side benefits
limitations of fiscal policy
Time Lags -Recognition lag -Decision-making lag -Implementation lag -Budget only formulated once a year -expenditure/impact lag -Short term Political Considerations -New laws need majority votes -Public popularity E.g. cutting protection Global considerations -Expectations of global markets and investors Conflicting EConomic Objectives -Eco growth + low inflation -Low unemployment + low inflation Must find compromise -CAD and Foreign Debt -Sustained budget deficit worsens the CAD and foreign debt
monetary policy
The management of interest rates by the RBA in order to influence economic activity
purpose of monetary policy
Price stability
-2-3% inflation target
Full employment
Economic welfare and prosperity of the Australian people
implementation of expansionary monetary policy
RBA undertakes buying back of government securities, increasing the supply of cash in the market and lowering the cash rate
RBA buys government securities/bonds from financial institutions, transferring cash to the banks exchange settlement accounts
implementation of contractionary monetary policy
RBA undertakes sales of government securities, lowering the supply of cash in the money market and lifting the cash rate
Financial institutions transfer cash to the RBA, decreasing the supply of cash in the exchange settlement accounts
impact of expansionary monetary policy
Increases consumption as household mortgage repayments are lower
More investment by businesses
Decreased savings due to lower interest rates
Easier to access credit which increases consumption and investment
Increased asset prices - wealth effect
Depreciation in AUD - trade balance improves
strengths of monetary policy
Short implementation time lag
Implemented independently of government, so limited political bias
Works better at halting aggregate demand than increasing it
limitations of monetary policy
Long impact time lags
Expansionary monetary policy may not lead to extra AD especially if there is limited confidence
Some people see lower interest rates as a sign of a weak economy, reducing consumer confidence
Inability to target particular areas of the economy
Fiscal policy may undermine monetary policy
External shocks make monetary policy less effective
rationale for microeconomic policies
Designed to improve efficiency, productivity and international competitiveness
Designed to shift long term aggregate supply to the right
Should result in a better allocation of resources
Often leads to structural changes
types of efficiency
technical/productive
allocative
dynamic
technical/productive efficiency
Businesses producing the maximum output with minimum resources used
allocative efficiency
Resources are allocated in such a way to reflect consumer preferences
dynamic efficiency
Businesses being able to adapt to change in markets
types of productivity
labour
capital
multifactor
product market
The market where final goods and services are sold
factor market
The market where factors of production are traded, like labour
national competition policy
Designed to increase competition in natural monopolies like gas and water services
Established the ACCC
Limits anti-competitive behaviour such as cartels
Reform implemented to open up monopoly industries
examples of microeconomic policy
Privatisation of Government Enterprises -E.g. Qantas and Telstra Financial Deregulation -Allowing banks to set own interest rates -Reduction in protection -Floating exchange rate 1983
benefits of microeconomic policy
Greater competition through deregulation of markets and eliminating anti-competitive behaviour
Higher productivity, economic growth and lower prices
Expanding industries require more labour, reducing unemployment
Enhanced international competitiveness will lead to more exports and greater external stability
Can target specific industries that are inefficient
limitations of microeconomic policy
May cause price rises if the monopoly was previously subsidised
May cause short term structural unemployment
50,000 people lost jobs when car manufacturing ceased in Australia
Political conflicts
