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HSC Economics > Topic 4: Economic Policies and Management > Flashcards

Topic 4: Economic Policies and Management Flashcards

1
Q

economic objectives

A
  • economic growth
  • full employment
  • price stability
  • external stability
  • environmental stability
  • distribution of income
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2
Q

economic growth objective

A

Sustainable growth

3-4% per year

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3
Q

full employment objective

A

NAIRU
No cyclical unemployment
Production is maximised, prices are minimised

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4
Q

price stability objective

A

2-3% inflation rate

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5
Q

external stability objective

A

Government must be able to meet its long-term financial obligations

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6
Q

environmental sustainability objective

A

Ecologically sustainable development

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7
Q

distribution of income objective

A

More equitable distribution of income

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8
Q

conflicts between economic objectives

A 
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
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9
Q

purpose of macroeconomic policies

A

In general, macroeconomic policies work to smooth out fluctuations in the business cycle

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10
Q

fiscal policy

A

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

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11
Q

budget revenue

A

Direct taxes
Indirect taxes
Sale of public assets
Operation of enterprises

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12
Q

budget expenditure

A 
Welfare system
Health
Education
Transport
defence
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13
Q

budget outcomes and stances

A

Surplus
Deficit
Balanced

Expansionary
Contractionary
Neutral

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14
Q

Factors that Affect the Budget Outcome

A

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

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15
Q

Managing a budget surplus

A

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)

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16
Q

Managing a budget deficit

A 
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
17
Q

benefits of fiscal policy

A

Specific targeting to certain areas of the economy

Supply Side benefits

18
Q

limitations of fiscal policy

A 
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
19
Q

monetary policy

A

The management of interest rates by the RBA in order to influence economic activity

20
Q

purpose of monetary policy

A

Price stability
-2-3% inflation target
Full employment
Economic welfare and prosperity of the Australian people

21
Q

implementation of expansionary monetary policy

A

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

22
Q

implementation of contractionary monetary policy

A

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

23
Q

impact of expansionary monetary policy

A

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

24
Q

strengths of monetary policy

A

Short implementation time lag
Implemented independently of government, so limited political bias
Works better at halting aggregate demand than increasing it

25
Q

limitations of monetary policy

A

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

26
Q

rationale for microeconomic policies

A

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

27
Q

types of efficiency

A

technical/productive
allocative
dynamic

28
Q

technical/productive efficiency

A

Businesses producing the maximum output with minimum resources used

29
Q

allocative efficiency

A

Resources are allocated in such a way to reflect consumer preferences

30
Q

dynamic efficiency

A

Businesses being able to adapt to change in markets

31
Q

types of productivity

A

labour
capital
multifactor

32
Q

product market

A

The market where final goods and services are sold

33
Q

factor market

A

The market where factors of production are traded, like labour

34
Q

national competition policy

A

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

35
Q

examples of microeconomic policy

A 
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
36
Q

benefits of microeconomic policy

A

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

37
Q

limitations of microeconomic policy

A

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

HSC Economics (6 decks)

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