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Eco notes > Unit 4 AOS 1 > Flashcards

Unit 4 AOS 1 Flashcards

1
Q

What is budgetary/fiscal policy?

A

It is the manipulation of the level and composition of Federal Government receipts/revenues and outlays/expenses in order to assist in the achievement of its economic and social goals for Australia and it operates counter-cyclically

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2
Q

What are the main goals of budgetary policy?

A

The main goals are to improve the welfare or living standards of all Australians or to achieve the most efficient allocation of resources

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3
Q

What are receipts in budgetary policy?

A

Receipts/revenues are the federal government’s incoming receipts of money that for budget outlays and they have a significant impact on disposable incomes, AD, economic activity, inflation, the allocation of resources, external transactions, income distribution and living standards

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4
Q

What is expenditure in budgetary policy?

A

Expenditure/outlays are how the federal government uses the revenue it collects to provide goods and services for the community and it can impact disposable incomes, AD, economic activity, inflation, the allocation of resources, external transactions, income distribution and living standards

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5
Q

What is the composition of receipts?

A

Direct taxes, indirect taxes and non-tax revenue

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6
Q

What are direct taxes?

A

Direct taxes are taxes that are paid directly to the government and usually applied on income, whether that be personal income or business/corporate incomes

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7
Q

Examples of direct tax?

A

Income tax, capital gains tax, medicare levy, withholding tax, company tax and superannuation fund tax

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8
Q

What are indirect taxes?

A

Indirect taxes are usually taxes on expenditure or consumption, not paid to the government by the consumer but by another party, usually a supplier

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9
Q

Examples of indirect tax?

A

Excise duty, customs duties or tariffs and GST

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10
Q

What is non-tax revenue?

A

Non-tax revenue is the recurring income earned by the government from sources other than taxes

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11
Q

Examples of non-tax revenue

A

Sale of goods and services, repayments on loans plus interest, dividends, HECS, profits from Aus Post and other GBEs abd sale of government assets

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12
Q

What are the differnent types of tax?

A

Progressive tax, proportional tax and regressive tax

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13
Q

What is progressive tax?

A

It is a tax that collects proportionally more from higher income earners compared to lower income earners and it involves the tax rate increasing as income increases

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14
Q

What is proportional tax?

A

It is tax that collects proportianlly identical amounts from all income earners and it involves the rate of tax remaining the same

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15
Q

What is regressive tax?

A

It is a tax that collects proportionally more from lower income earners compared to higher income earners

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16
Q

What are the two types of government spending?

A

Current expenditure where spending creates no ongoing benefit and Capital expenditure where spending creates an ongoing benefit

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17
Q

Examples of government spending

A

Social security and welfare, health spending, defence, education spending, transport and communication, housing and community amenities, general public services and net payments to other governments/Public Debt interest

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18
Q

Are transfer payments considered a part of government spening?

A

Transfer payments are not considered a part of government spending because the person who recieves the transfer payment will actually spend it (C and I)

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19
Q

What are the types of budget outcomes?

A

Balanced budget, budget deficit and budget surplus

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20
Q

Equation for a blanaced budget

A

Revenue = expenditures

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21
Q

Equation for budget deficit

A

Revenue < expenditures

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22
Q

Equation for budget surplus

A

Revenue > expenditures

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23
Q

What is the headline cash balance?

A

It is the total cash recieved by the federal government minus the total cash paid

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24
Q

What is the underlying cash balance?

A

It seeks to exclude cash flows that are included in the Headline cash balance that do not have a direct or immediate impact on the economy

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25
Q

What is the Future Fund?

A

Future Fund earnings are mandated to be reinvested in the Future Fund and not to be used for general government expenditure

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26
Q

What are net proceeds from asset sales or purchases?

A

They are ‘one-off’, non-recurring, transactions that will not feature as cash flows in the future Budgets

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27
Q

What is the fiscal outcome?

A

It relates to the revenue that has been earned over the relevant period compared to the expenses that have been incurred over the period and also excludes net capital investment

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28
Q

What is the underlying budget balance as a percentage of GDP?

A

It compares the budget to GDP and a higher percentage refers to a highly expansionary budget compared to GDP while a smaller percentage refers to a less expansionary budget

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29
Q

What does the percentages of the underlying budget balance as a percentage of GDP mean?

A

A negative percentage of GDP indicates that the budget will take an expansionary stance and a positive percentage of GDP indicates that the budget will take a contractionary stance

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30
Q

When are actual budget figures released?

A

The actual budget figures are for the previous financial year are released in September or October of the following year

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31
Q

What is the budgetary stance?

A

It is the position the government takes for a particular budget period

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32
Q

What are the two stances of the budget and what will they result in?

A

One stance is a contractionary stance and it will result in a budget surplus
The other stance is an expansionary stance and it will result in a budget deficit

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33
Q

What is an impact of an expansionary budget on AD?

A

An increase in G1 and an increase in G2 along with upward pressure on C and I via policy or transfer payments will result in an increase in AD

34
Q

What is an impact of a contractionary budget on AD?

A

A decrease in G1 and a decrease in G2 along with downward pressure on C and I via policy or transfer payments will result in a decrease in AD

35
Q

What are the two alternative impacts budgetary policy can have regarding their stance?

A

One is that the budgetary stance adopted by the government could be expansionary due to there being a large budget deficit, however, there can be a specific budgetary policy that is likely to have a contractionary effect on levels of economic activity

The other is the government could be contractionary due to there being a budget surplus, however, there can be a specific budgetary policy that is likely to have an expansionary effect on levels of economic activity

36
Q

What is bracket creep?

A

It occurs when wages increases but the tax brackets do no change and it can lead to minimum wage earners being in the middle tax bracket

37
Q

What are the 3 options a government has when financing a budget deficit?

A

Selling bonds to the RBA
Selling bonds to overseas investors
Selling bonds to Australian investors

38
Q

What is a government bond?

A

It is a bond issued by the federal government, generally with a promise to pay periodic interest payments and to repay the intial value by a certain date

39
Q

What does selling bonds to the RBA involve?

A

Sold to the RBA through secondary money markets, it is the most expansionary and inflationary policy as the RBA uses money that is not already in circulation within the economy (RBA vault or printed) and it is not commonly used as the RBA does not want to be seen as funding the government which ensure that there is a clear seperation between budgetary and monetary policy

40
Q

What does selling bonds to overseas investors involve?

A

It involves adding to NFD and increasing the CAD as there is an increase in outflows of interest payments, results in large amounts of capital inflow whcih apprecieates the AUD which can negatively impact exports and therefore can counteract the expansionary stance of the budget

41
Q

What does selling bonds to Australian investors involve?

A

It is the least expansionary because it place upward pressure on interest rates as the demand for money within the financial markets increase which results in an increase in interest rates, higher interst rates dont stimulate AD and it will lead to crowing out of the private sector as consumers and businesses reduce consumption and investment

42
Q

What is crowding out?

A

It is competition among domestic borrowers over funds and it could lead to a reduction in household and business consumption and investment

43
Q

What are the problems with a budget deficit?

A

Continued cost of financing the deficit, the crowding out effect, building up of government debt, increased amounts of interest that must be paid, impact on credit ratings, higher borrowing costs and a larger deficit, higher levels of tax and lower levels of government spending to pay off debts which can have negative consequences on growth and unemployment

44
Q

What is a budget surplus used for?

A

Investing in fincancial markets, repaying debt, investing in funds and Future Funds and contributing to crowding in

45
Q

What is crowding in?

A

A reduction in competition among domestic investors and this leads to greater levels of household and business consumption and investment

46
Q

What are the benefits of a budget surplus?

A

It can help to buffer Australia against future economic decline with surplus being reinvested into Future Funds, it generates international investor confidence which helps Australia to maintain its AAA rating and it allows monetary policy to better manage the economy, particularly avoiding the chances of crowding out occurring

47
Q

What are discrtionary stabilisers?

A

They are deliberate changes in policy made to alter the compostion of receipts and payments made by the government to impact the size of the budget and it is the structural component of the deficit

48
Q

What are automatic stabilisers?

A

They are changes to the budget that occur automatically with the changes in the level of economic activity, they represnt the cyclical component of the budget and work counter cyclically

49
Q

What are the policies for the 2023/24 budget?

A

Instant asset write off
Child care subsidy
Infrastructure pipeline

50
Q

What is the instant asset write off policy and how does it impact AD?

A

It provides small businesses access to $20,000 instant asset write off and it leads to an increase in business investment (I) expenditure

51
Q

What is the child care subsidy and how does it impact AD?

A

It reduces the cost of child care for families earning up to $530,000 per year and it will increase household consumption (C) as they will have greater access to disposable income

52
Q

What is the infrastructure pipeline?

A

It is a funding pipeline with $120 billion of spending expected in the next 10 years and it will increase the overall level of government spending (G)

53
Q

What are the policies for the 2022/23 budget?

A

Increase in the low and middle income tax offset (LMITO)
$250 cash payment for eligible pensioners and welfare recipient
50% reduction in the excise tax on fuel for 6 months

54
Q

Budgetary policy and unemployment

A

Budgetary policy has the ablility to focus on particular unemployment concerns whether it is structural, cyclical, hardcore, long term or youth unemployment and the government can use the budget to stimulate AD and create jobs by delivering more expansionary budget outcomes that can help reduce cyclical unemployment

55
Q

What is the overall goal of budgetary policy?

A

The overall goal is to improve the welfare or living standards of all Australians

56
Q

What are the policies for the 2021/22 budget?

A

The JobTrainer Fund
Mental health services

57
Q

What are the strengths of budgetary policy?

A

The government can use discretionary stabilisers to target particular sectors (unlike monetary policy)
The budget will automatically swing into action via the operation of automatic/cyclical built-in stabilisers
Impact lag is relatively short due to governments direct control over taxation, government spending and ability to make required adjustments to stabilise AD
Effective in stimulating AD directly
Many checks and balances within the legislative process
Public scrutiny makes the government accountable and transparent

58
Q

What are the weaknesses of budgetary policy?

A

Financial restrictions
Can undermine monetary policy via crowding out/in issues
Discretionary stabilisers could prove to be pro-cyclical due to long time lags
Lack of flexibility as only delivered once per year
Implementation lag due to legal processes
Political hurdles
Political bias

59
Q

What is the RBA’s main goal?

A

It is price stability/low inflation and this is inflation sitting at 2-3% over the medium term

60
Q

What is the role of the RBA?

A

Their role is to set the cash rate, manage the payment system, print money and act as the bank for the government

61
Q

What happens when low inflation/price stability is achieved?

A

The RBA will then focus on achieving the goal of Full Employment and the goal of Strong and Sustainable Economic Growth

62
Q

What is the target cash rate?

A

It is the cash rate set by the RBA at its monthly board meetings

63
Q

What is the Overnight Money Market?

A

It is a market in which banks borrow from and lend to eachother via Electronic Settlement Accounts and the price in this market is the interest rate that banks are willing to lend to eachother at

64
Q

What is liquidity?

A

Liquidity is the supply of cash in the overnight market

65
Q

How does the RBA change liquidity?

A

It will buy or sell bonds and government securities/Commonwealth Government Securities (CGS) or Repurchase Agreements (repos) and this is referred to as Open Market Operations

66
Q

How does the RBA increase liquidity?

A

The RBA will purchase bonds from the banks within the overnight money market and this injects cash into the market which increases liquidity and decreases the cash rate

67
Q

How does the RBA decrease liquidity?

A

The RBA will sell bonds to the banks within the overnight money market and this removes cash from the market which decreases liquidity and increases the cash rate

68
Q

What is the loosening of monetary policy?

A

It involves tge RBA anouncing a lower target cash rate and this means that they will increase liquidity through Open Market Operations in the overnight money market which will reduce the cash rate

69
Q

What is the tightening of monetary policy?

A

It involves the RBA announcing a higher target cash rate and this means that they will decrease liquidity through Open Market Operations in the overnight money market which will increase the cash rate

70
Q

What is Forward Guidance?

A

It is an unconventional monetary policy tool that involves the RBA making public commitments as to how it will conduct monetary policy in the future and it can influence the stance of monetary policy without taking any action

71
Q

What does an expansionary/accomodative monetary policy stance involve?

A

It involves the cash rate being set at less than 3.5%, stimulation of AD and increasing demand inflationary pressures within the economy

72
Q

What does a contractionary/restrictive monetary policy stance involve?

A

It involves the cash rate being set at greater than 3.5%, restriction of AD and decreasing demand inflationary pressure within the economy

73
Q

What does a neutral monetary policy stance involve?

A

It involves the cash rate being set at approximately 3.5% and that the cash rate is neither working to stimulate or restrict the economy and that there is no expansionary or contractionary effect present

74
Q

What are transmission mechanisms?

A

Refers to the way a change in interest rates affects AD and economic activity and ultimately the achievement of low inflation/price stability

75
Q

What are the 4 ways interest rate changes transmit their effects on economic activity?

A

Savings and Investment (The cost of credit)
Cash flow
Exchange rate movements
Asset prices/values

76
Q

What is the savings and investment channel?

A

Interest rates influence economic activity by changing the incentives for saving and investment directly impacting private consumption and private investment expenditure

77
Q

How do changes in the cash rate impact the savings and investment channel?

A

An increase in the cash rate means consumeers are more likely to save which reduces spending and business are less likely to borrow which decreases investment
A decrease in the cash rate means consumeers are less likely to save which increases spending and business are more likely to borrow which increases investment

78
Q

How do changes in the cash rate impact the cash flow channel?

A

An increase in the cash rate will lead to an increase in repayments etc which leads to decreased levels of discretionary and a reduction in AD
A decrease in the cash rate will lead to a decrease in repayments etc which leads to increased levels of discretionary income and an increase in AD

79
Q

How do changes in the cash rate impact the exchange rate channel?

A

An increase in the cash rate will lead to an appreciation in the AUD which reduces Aus international competitveness, decreasing exports and increasing imports, reducing AD
A decrease in the cash rate will lead to a depreciation in the AUD which will increase Aus international competiveness, increasing exports and decreasing imports, increasing AD

80
Q

How do changes in the cash rate impact the asset price/value channel?

A

An increase in the cash rate will lead to less household borrowing and decreased demand for assets which will cause a reduction in asset prices and household wealth leading to decreased prosperity and consumption resulting in a reduction in AD
A decrease in the cash rate will lead to more household borrowing and increased demand for assets which will cause an increase in asset prices and household wealth leading to increased prosperity and consumption resulting in an increase in AD

81
Q
A

Eco notes (4 decks)

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