Unit 4 AOS 1

Question 1

The need for AD policies in terms of stabilising the business cycle

Answer 1

Aggregate demand policies are needed to stabilise the business cycle as they work in a counter-cyclical way to either slow or boost aggregate demand, thus economic growth between its target range of 3-3.5%

Question 2

Contractionary policies

Answer 2

Increase in receipts, Decrease in outlays
increase in savings and Used to slowdown the economy.
Decrease in the deficit and increase in the surplus.

Question 3

Expansionary Policies

Answer 3

Decrease in receipts, Increase in outlays
Increase in injections and to stimulate the economy.
increase deficit and decrease surplus.

Question 4

types of Receipts

Answer 4

Direct taxes, Indirect taxes and other revenues

Question 5

Types of Outlays

Answer 5

Transfer payments, current consumption expenditure (G1) and capital expenditure.(G2)

Question 6

Budget outcome

Answer 6

Balanced: Receipts = Outlays
Deficit: Outlays > Receipts
Surplus: Receipts > Outlays

Question 7

Finance a deficit

Answer 7

If a government cannot fund a deficit by drawing on savings it will need to increase government debt (borrow) to fund the deficit. To do this the government will have to sell bonds to either Australian Investors, the RBA or overseas investors.

Question 8

Utilise a Surplus

Answer 8

A surplus can add to balances in special saving funds, such as future-fund or it can help pay off debts, as it will increase money supply, reversing the selling of bonds.

Question 9

The relationship between the budget outcome and the level of government (public) debt.

Answer 9

Running a budget deficit does not always result in government (public) debt, since there may be existing savings that could have been used to fund the deficit. If there are no savings, a government will have see an increase in debt, as the government needs to borrow money by selling bonds in return fo the money required. Also any surplus the government makes will not clear existing debt but reduce the amount over time.

Question 10

Automatic Stabilisers in influencing AD and stabilising the business cycle.

Answer 10

Automatic stablisers are built into the budget tax receipts and some government expenses, they operate in a counter cyclical way to boost or slow economic activity without the treasurer deliberatley changing their level or announcing new policy.

Question 11

Discretionary stablisers

Answer 11

Help to change the budget outcome through deliberate changes to budget receipts and outlays by the federal government

Question 12

Job Keeper payments

Answer 12

a wage subsidy designed to maintain the flow of income for the employee and sustain the relationship between employee and employer. These payments are an outlay, leading to an increase in outlays relative to receipts, increasing the budget deficit.

Question 13

Impact on the goals (Job Keeper)

Answer 13

Inflation: had deflation so this injection should hopefully push inflation back to its target range of (2-3%).
Full Employment: Sustain relationship between employee and employer, people on the payments aren’t in unemployment figures, reduces cyclical unemployment compared to without job keeper.
Economic growth: High marginal propensity to be spent, AD stimulated through C as people receiving payment will spend in.
Living Standards: material: business remain open increasing access to G + S.
Non-material wage cuts, effects on mental health, increasing stress and anxiety.

Question 14

Instant Asset right off

Answer 14

If an asset is less that 150,000, the business has less than 500 million aggregate turnover and the first use is within the time frame. The business can right off the entire expense, decreasing profit ‘paper’ and therefore decreasing company tax owed. Impact on budget outcome is that this will decrease total receipts and increase outlays, increasing deficit.

Question 15

Impact on the goals (Instant asset right off)

Answer 15

Inflation: increase demand inflation
Full employment: increase derived demand for labour as business seek to grow productive capacity
Economic Growth: Increase in capital investment and increase in AD through C as business save money from paying less tax.
Living Standards: Increase material, greater access to g/s) and Increase in non-material, wage growth, increase household income and therefore decrease crime rates.

Question 16

Infrastructure Spending

Answer 16

100B infrastructure spending, Capital spending (G2) over the next 10 years. This as an expansionary method, decreasing receipts and increasing outlays therefore increasing budget deficit.

Question 17

Impact on the goals (infrastructure spending)

Answer 17

Inflation: Increase in demand inflation as create jobs, increasing disposable incomes and therefore putting upward pressure on prices.
Full Employment: Increase in jobs, increases derived demand for labour and therefore decreasing unemployment.
Economic Growth: An increase in G2 spending would normally lead to individuals receiving more income and therefore increasing AD however because of Covid it hasn’t happened.
Living Standards: Increase material, Increase in incomes, increases access to g/s. Non-material more income to support people, decreasing crime rates, increase quality of life.

Question 18

Strengths of Budgetary Policy

Answer 18

• Automatic stabilisers work quickly without intervention, and disappear once the economy has recovered.
• The government can target specific areas that require stimulus.
• Discretionary stabilisers such as stimulus payments can be implemented quickly to boost AD.

Question 19

Weaknesses of Budgetary Policy

Answer 19

• It is politically challenging to increases taxes and cut outlays as they are unpopular with voters. E.g The government trying to wind back JobKeeper and Covid stimulus payments has been met with resistance.
• its difficult to get policies through parliament when the government does not have the majority in the senate.
• Governments are limited by financial constraints and a fear of a downgraded credit rating.

Question 20

Monatary Policy

Answer 20

manipulation of the cash rate in order to achieve specific economic goals and ultimately improve living standards and wellbeing for all Australians.

Question 21

Role of RBA

Answer 21

• stability of the currency
• the maintenance of full employment in Australia
• economic prosperity and welfare of Australians

Question 22

The 5 Transmission Mechanisms

Answer 22

Asset Prices 
Exchange Rates
Savings and Investment 
Cash Flow
Availability of Credit
*counter-cyclical mechanisms and will work in reverse direction of the current economy to get it back to the desirable state.*

Question 23

Savings and Investment and influence on AD

Answer 23

A tighter monetary policy, will result in higher interest rates which makes it more costly to borrow. A higher cost of credit will lead to a reduce in the willingness of households to borrow money for the purchase of g&s and a provide incentive to save. Therefore, decreasing Consumption and Investment and thus decreasing AD, economic growth and inflationary pressure.

Question 24

Cash flow and influence on AD

Answer 24

Higher interest rates leads to less cash flow in the economy, In particular households will immediately see a drop in their discreationary incomes as they need more of their income to pay interest on debt. Typically this will lead to reduce household Consumption and AD in the economy when interest rates rise, causing a decrease in economic activity and inflationary pressures.

Question 25

Asset Prices/ Wealth

Answer 25

Higher interest rates will generally lead to assets such as housing and shares to decrease in value because demand for these various types of assets is likely to decrease. This reduces the average ‘wealth’ of households and reduces Consumption, AD and economic activity and inflationary pressures.

Question 26

Exchange Rate and how they are affected by monatary policy

Answer 26

Exchange rates are positvely correlated to interst rates. Higher interest rates cause and appreciation of the exchange rates, as investors will be more inclined to invest money in Australia as they will get more money back in return and their for increasing the demand for AUD, decreasing the supply and placing upward pressure on exchange rates.

Question 27

Avaliability of money and impact of monatary policy

Answer 27

Avalibility of money Likely to fall in times of higher interest rates because some households or businesses will not be able to meet lending criteria established by financial institutions, because of increased risk of default. In a peak or a boom this will decrease AD through the investment and consumption component and there pushing economic growth back to the target range.

Question 28

Monetary Policy Stance

Answer 28

Expansionary Stance = cash rate below 3.5%

Contractionary Stance= cash rate above 3.5%

Question 29

Focus of monetary policy stance over the last two years

Answer 29

With Inflation being below the target range for the past few years, the RBA has employed an expansionary stance to promote and increase in Aggregate Demand, decrease unemployment and increase economic growth.

Question 30

Role of open market operations in altering interest rates

Answer 30

Open market operation refers to the RBA selling or buying back securities to financial institutions to control the supply of money in the market and thus the cash rate, which will into alter the level of interest rates. If the RBA sells securities it reduces supply of the money and increase interest rates. If the RBA buys back securities it increases the supply of money in the market thus decreasing interest rates.

Question 31

Strengths of Monetary Policy

Answer 31

• Free from political bias
• Short implementation lag
• Relatively powerful at restraining AD during a boom.

Question 32

Weaknesses of Monetary Policy

Answer 32

• Impact Lag
• RBA does not have direct control over interest rates, only the cash rate.
• Unable to restrain or stimulate activity in specific areas, monetary policy is a ‘blunt Instrument’