unit 4 aos 1

Question 1

monetary policy

Answer 1

macroeconomic policy instrument used by the RBA to manage the level of AD and economic activity in the aus economy by manipulating the level of interest rates. a counter cyclical policy as its used to change the direction of economic cycles

Question 2

RBA

Answer 2

australias central bank. conducts monetary policy, works to maintain a strong financial system and issues the nations currency. they provide selected banking and registry services to a range of aus government agencies and to a number of overseas central banks and official institutions

Question 3

role of monetary policy (3)

Answer 3

1. the stability of aus currency
2. maintenance of full employment in aus
3. economic prosperity and welfare

Question 4

open market operations

Answer 4

the buying/selling of second hand government securities in the overnight money market with a view of establishing the cash rate

Question 5

exchange settlement accounts

Answer 5

each commercial bank and financial institution has to have an ESA held at the RBA so that each bank can settle transactions with other banks at the end of each day.

Question 6

repurchase agreements

Answer 6

contracts where the RBA will buy/sell a commonwealth government security at its current market price but then agrees to sell or buy the same CGS at an agreed price in the future

Question 7

monetary policy stance

Answer 7

a drop in the cash rate signals a looser or more expansionary monetary policy stance that makes borrowing/spending cheaper and more attractive boosting AD

Question 8

transmission mechanisms (5)

Answer 8

cash flow, saving and investment, exchange rate movement, availability of credit, asset price

Question 9

savings and investment (transmission mechanism)

Answer 9

an increase in interest rates discourages households from borrowing/spending since repayments are higher. encourages saving. firms are discouraged as fewer projects meet the required return on investment, decreasing C & I

Question 10

cash flow (transmission mechanism)

Answer 10

when monetary policy is tightened, households with existing variable loans experience a fall in discretionary income since they have to spend more to service the loan. firms experience a reduction in cash flow since they must pay more on existing variable loans, reducing willingness and ability to spend/invest, decreasing C & I

Question 11

exchange rate movements (transmission mechanism)

Answer 11

when interest rates increase, theres an increase in capital inflow into australia since overseas investors want a higher return, increasing demand for AUD and decreasing capital outflow which decreases the supply of AUD, depreciating the value of the AUD. international competitiveness declines, reducing demand for our exports while increasing import demand, decreasing net exports & AD

Question 12

availability of credit (transmission mechanism)

Answer 12

when monetary policy is tightened, fewer households & firms meet requirements for loans from banks since fewer applicants are less likely to meet repayments associated with higher interest rates, reducing availability of credit and volume of loans made, reducing C & I

Question 13

asset price/wealth effect (transmission mechanism)

Answer 13

when monetary policy is tightened, demand for major assets (housing) prices decreases as the cost of purchasing has risen. as prices of these assets fall, consumers experience the negative wealth effect where owners feel relatively poorer due to decreased ‘paper’ wealth. consumers experience a fall in marginal prosperity to consume, decreasing C & AD

Question 14

strengths of monetary policy

Answer 14

free from political bias (no association with the government), good at restraining AD during a boom as it reduces discretionary income, short implementation lag (board meets once a month and can act fast to alter cash rate), influences economic agents as statements from the RBA governor can impact consumer, business behaviour

Question 15

weaknesses of monetary policy

Answer 15

blunt instrument (unable to restrain/stimulate activity in certain areas) doesnt control interest rates (banks can choose to leave rates as they are), lowering interest rates creates demand inflation but cannot directly reduce cost inflation, ineffective in times of high household debt (borrowing money results in higher debt even with low interest rates)

Question 16

budgetary policy

Answer 16

the manipulation of level and composition of federal government receipts/outlays in order to assist in the achievement of its economic and social goals.

Question 17

goal of budgetary policy

Answer 17

1. improve welfare/living standards of australians

2. achieve most efficient allocation of the nations resources to maximise living standards & achieve key goals

Question 18

composition of receipts (3)

Answer 18

direct taxes, indirect taxes, other revenue

Question 19

direct taxation (receipt)

Answer 19

paid directly by economic agents based on income earned (personal income tax, company tax etc)

Question 20

indirect taxation (receipt)

Answer 20

paid by economic agents via purchase of goods/services (GST, excise tax, luxury car tax)

Question 21

other revenue (receipt)

Answer 21

non tax revenue such as sale of goods/services or dividends from government businesses (aus post)

Question 22

composition of outlays (3)

Answer 22

consumption/current expenditure (G1), capital expenditure (G2), transfers

Question 23

consumption/current expenditure (outlay)

Answer 23

payments for goods/services consumed in the current budget period with no ongoing future benefits (payments to public servants or consumables)

Question 24

capital expenditure (outlay)

Answer 24

have ongoing benefits (infrastructure, defence equipment)

Question 25

transfers (outlay)

Answer 25

to the private sector through social security and welfare payments, family tax benefits, pensions

Question 26

balanced budget

Answer 26

receipts equal outlays

Question 27

budget deficit

Answer 27

receipts less than outlays

Question 28

budget surplus

Answer 28

receipts more than outlays

Question 29

measures of budget outcomes (4)

Answer 29

headline, underlying, fiscal, net operating outcome

Question 30

headline (budget outcome)

Answer 30

total cash received by federal government less total cash paid

Question 31

underlying (budget outcome)

Answer 31

excludes transactions not directly impacting economy (future fund earnings since theyre reinvested into the future fund) & (net cash flows from investments in financial assets for policy purposes as these one off transactions would distort the budget outcome)

Question 32

fiscal (budget outcome)

Answer 32

revenue earned and expenses incurred over the financial period regardless when cash is received or paid

Question 33

net operating outcome (budget outcome)

Answer 33

Cash revenue less cash expenses, excluding capital spending. this leads to deficit being much smaller than underlying deficit

Question 34

types of stabilisers (2)

Answer 34

automatic and discretionary

Question 35

automatic stabilisers

Answer 35

cyclical component of budget & is built in aspects of the budget which change in response to economic conditions in counter cyclical ways without deliberate government actions

Question 36

discretionary stabilisers

Answer 36

structural component of budget & are deliberate actions taken by the government to change revenue/expenses in a counter cyclical way.

Question 37

financing a deficit

Answer 37

using savings from past surpluses, selling bonds to RBA, selling bonds to aus/foreign investors

Question 38

utilising a surplus

Answer 38

repay domestic/overseas debt, save (can be used to fund future deficits), put money into special funds for specific purposes (future fund, building aus fund, education investment fund)