Unit 4 AOS 2 - Chapter 6: Policies For Managing Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

This is the total amount of goods and services available for sale in an economy. Increasing aggregate supply involves improving the productive capacity of an economy, by increasing the amount of productive resources in use and/or increasing the efficiency of their use, that is a higher rate of productivity.

Question 2

What do macroeconomic policies ignore?

Answer 2

Whilst using macroeconomic policies to manage aggregate demand is important in the short term for dealing with economic problems like:
. booms and recessions
. demand inflation and cyclical unemployment
. the cyclical CAD
. and inequality in private incomes

they ignore the vital roles played by aggregate supply policies in reducing supply-side troubles like:
. cost inflation
. structural unemployment and inefficiency that limits economic growth
. international competitiveness
. incomes and living standards.

Question 3

In other words …

Answer 3

Aggregate supply policies can also be used to help promote the government’s key economic goals.

Question 4

What would happen without the measures to grow aggregate supply and productive capacity?

Answer 4

Australia’s economic performance would deteriorate and our living standards might stagnate or even go into decline.

Question 5

What are aggregate supply polices?

Answer 5

Aggregate supply policies are government strategies that seek to create more favourable or sustainable supply-side conditions for firms that produce goods and services.

Typically these measures help reduce Australia’s production costs, increase efficiency, provide better incentives, improve access to resources, and expand our productive capacity and sustainable level of GDP, thus growing the aggregate supply (AS) line.

Question 6

What do aggregate supply polices include?

Answer 6

Aggregate supply policies include a wide range of measures such as:
. Microeconomic Reforms
. Supply-side aspects of Budgetary Policy
. Immigration Policies
. Environmental Policies

Question 7

Explain how successful policies promote aggregate supply.

Answer 7

The economy’s productive capacity or potential grows from AS1 to AS2 (line shifts to the right).

In turn this increases the sustainable equilibrium level of national output from GDP1 to GDP2 (horizontal axis), causing incomes to grow.

Additionally, cost inflation slows from P1 to P2 (vertical axis). This not only improves the purchasing power of incomes, but it also helps to strengthen our international competitiveness.

Ultimately all these outcomes help to boost Australian living standards.

Question 8

Explain the following category of supply-side policies that affect the size of the Australian economy’s productive capacity and aggregate supply line: microeconomic reforms

Answer 8

These are cost-cutting, efficiency-promoting strategies such
as the national competition policy (NCP), labour market reforms, deregulation of key markets and liberalisation of international trade. Greater efficiency promotes the growth of productive capacity and hence our AS line.

Question 9

Explain the following category of supply-side policies that affect the size of the Australian economy’s productive capacity and aggregate supply line: supply-side aspects of budgetary policy

Answer 9

These aspects of the annual budget include supply-promoting measures such as spending on social and economic infrastructure projects and incentives created through lower tax rates and welfare reforms. Building incentives, efficiency and productive capacity all help to grow our AS line.

Question 10

Explain the following category of supply-side policies that affect the size of the Australian economy’s prod utile capacity and aggregate supply line: immigration policies

Answer 10

These policies involve the government setting targets for the number and skills of immigrants allowed to come to Australia each year from over- seas, and are designed to affect the quality, size and age distribution of our labour force. This helps to grow productive capacity and hence our AS line.

Question 11

Explain the following category of supply-side policies that affect the size of the Australian economy’s prod utile capacity and aggregate supply line: environmental policies

Answer 11

These strategies include government measures that seek to pro- mote sustainable environmental outcomes by altering decisions made by households and businesses about their economic activities.

Despite possible shorter term limitations on the supply of goods that increase environmental damage, these measures could help increase the sustainable future rate of economic growth in productive capacity and AS.

Question 12

What do aggregate supply policies generally seek to do?

Answer 12

Aggregate supply policies generally seek to make supply-side conditions more favourable for producers of goods and services. In turn this helps pursue the government’s five key economic goals and, ultimately, living standards.

Question 13

What are the aims of the aggregate supply polices?

Answer 13

1. To boost the sustainable rate of economic growth through increased efficiency.
2. To promote low inflation by cutting production costs.
3. To promote external stability by increasing our international competitiveness.
4. To promote full employment especially in the long run, through better efficiency.
5. To promote an equitable income distribution through increased efficiency.

Question 14

1. Explain how aggregate supply policies boost the sustainable rate of economic growth through increased efficiency.

Answer 14

In the long term, Australia’s rate of economic growth is limited to the speed at which our productive capacity expands.

To increase the potential output of an economy and the sustainable rate of economic growth and living standards, aggregate supply policies need to:
. increase the quantity of natural, labour or physical capital resources available (⬆️A)
. and improve how efficiently these resources are used (⬆️E)

When thisI is achieved productive capacity is increased.

Question 15

What is productive capacity?

Answer 15

Productive capacity relates to the absolute maximum level of production that a country can obtain from the available resources at a point in time. This potential level of output is equated with the size of a nation’s production possibility frontier or its aggregate supply line.

Question 16

What four different types of efficiency might aggregate supply polices try to strengthen?

Answer 16

. Allocative efficiency
. Productive or technical efficiency
. Dynamic efficiency
. Inter-temporal efficiency

Question 17

What is allocative efficiency?

Answer 17

Allocative efficiency is about ensuring that resources are used in ways that maximise the satisfaction of society’s needs and wants by allocating them through strongly competitive markets.

Question 18

What is comparative cost advantage?

Answer 18

Comparative cost advantage is the principle that a nation should specialise in those areas of production in which it has the greatest cost advantage or least cost advantage.

Question 19

What is productive or technical efficiency?

Answer 19

Productive or technical efficiency is about businesses using least-cost methods to produce goods and services most efficiently.

Question 20

What is dynamic efficiency?

Answer 20

Dynamic efficiency involves firms being adaptive and creative in response to changing economic circumstances, in the ways they use resources.

Question 21

What is inter-temporal efficiency?

Answer 21

Intertemporal efficiency means ensuring there is a suitable balance between resources being allocated towards current consumption on the one hand and, on the other, adequate national saving for financing future investment.

Question 22

Besides improving efficiency and availability, what can aggregate supply polices do?

Answer 22

Aggregate supply efficiency measures and environmental polices can help to ensure that the rate of economic growth is both economically and environmentally sustainable in the long-run.

In turn, this may help to improve our overall living standards now and into the future.

Question 23

2. Explain how aggregate supply policies promote low inflation but cutting production costs.

Answer 23

As mentioned, many aggregate supply policies help to improve productivity and efficiency in the use of resources, and encourage firms to cut their production costs.

With lower production costs, businesses can sell their goods and services more cheaply and still make strong profits. As a result, this slows cost inflation and allows the government to better achieve its goal of low inflation (an annual average rise of around 2–3 per cent in the CPI).

In this case, our living standards are strengthened by improved purchasing power.

Question 24

3. Explain how aggregate supply policies promote external stability by increasing our international competitiveness.

Answer 24

Many aggregate supply policies expose businesses to stiffer competition. In order to survive, firms have to cut their production costs by implementing structural change in the way they produce goods and services, meaning they find the change to the most effective method of production known internationally.

In addition, by increasing efficiency, some aggregate supply policies also help firms reduce costs, allowing local businesses to sell profitably at lower prices. As a consequence of stronger competition, and lower costs and prices, local firms become more internationally competitive against imports in terms of their price, quality and customer satisfaction. This helps to reduce Australia’s structural CAD, and strengthen the exchange rate and external stability.

Question 25

4. Explain how aggregate supply policies promote full employment in the long run, through better efficiency.

Answer 25

In the long term, aggregate supply policies can often help firms to lift their efficiency, cut costs and make stronger profits. When profits are good, fewer firms close down and more start up or expand.

This should eventually help to reduce structural unemployment and create more jobs. Living standards should benefit from this. However, it is possible in the short term that some aggregate supply policies used to promote cost cutting and greater efficiency by firms, may also cause a rise in the level of structural unemployment.

Question 26

5. Explain how aggregate supply policies promote an equitable income distribution through increased efficiency.

Answer 26

By increasing our long-term efficiency and productive capacity, aggregate supply policies can help to promote an equitable distribution of income by ensuring that people have improved access greater quantities of basic goods and services and enjoy better living standards.

Question 27

More 5. Page 266

Answer 27

This could happen in several ways.
• Greater efficiency lowers production costs and inflation, and makes goods and services more affordable.
• With greater efficiency and lower costs, firms become more profitable and competitive. In the long term, fewer firms close down and more expand their operations, so there is less structural unemployment and incomes are higher.
• Increased efficiency helps a nation produce more output of goods and services from the same inputs. This helps to lift average GDP and income per capita. People can now have a larger slice of the nation’s production and income ‘cakes’, so material living standards improve.
• Greater efficiency and growing GDP and incomes cause the government’s tax revenues to rise. This allows for a better provision of community services and more generous welfare payments to the neediest individuals.

Question 28

Explain the nature and operation of microeconomic reform policies.

Answer 28

Microeconomic reforms are one type of aggregate supply policy. These are cost-cutting, efficiency promoting measures that seek to boost allocative, dynamic and technical efficiency by producing more output or GDP from fewer inputs or resources.

Achieving greater efficiency and lifting productivity often involve structural change or trans- forming the way particular industries, firms, markets and sectors within the economy, organise their production of goods and services. In turn, increased efficiency grows the economy’s productive potential or capacity.

Question 29

List the recent microeconomic reforms.

Answer 29

. Labour market reforms
. Trade liberalisation*
. Deregulation of key markets
. National competition policy (NCP)

only need to know one of these

Question 30

What is trade liberalisation?

Answer 30

This is the removal or reduction of restrictions or barriers on the exchange of goods and services between nations. This includes the removal of tariff obstacles (eg. Duties and surcharges) and non-tariff obstacles (eg. Licensing rules and quotas).

Australian governments used to (up until the 1970’s) heavily protect local industry from imports and foreign competition. This was done mainly using:
. high tariffs (indirect taxes levied on imports to make them dearer than the local item)
. generous subsidies (cash pay-ments to exporters or import-competing firms to help them cover their production cost, allowing them to sell more cheaply)
. and import quotas (legal restrictions on the quantity and type of imports permitted into the country).

Assistance like this sought to help local firms (often infant industries) survive foreign competition and, supposedly, create more jobs and fuller employment.

Question 31

What happened in the early 70’s?

Answer 31

The Australian government signalled the start of a change in its strategy of protecting local industry from foreign competition. Increasingly, it adopted the policy of trade liberalisation. This involved progressively:
. Cutting tariffs
. Reducing subsidies
. Abolishing import quotas
. Increasing the number of bilateral free trade agreements
. Scaling back other protective devices.

Question 32

What does increasing trade liberalisation mean?

Answer 32

Increasing trade liberalisation means that national borders no longer restrict the movement of goods, services and money capital between countries. With freezer trade movement and globalisation, we are forced to allocate resources into areas of production where Australia is most efficient and has a comparative cost advantage.

Question 33

What is globalisation?

Answer 33

This is the spread of businesses and international trade across national borders as if there was only one large market.

Question 34

What is the clear choice local firms have?

Answer 34

Either they must cut their costs, adopt world’s best practice in production and become internationally competitive, or they will face extinction.

Question 35

What does greater allocative efficiency mean?

Answer 35

Greater allocative efficiency means that more output can be gained from the same inputs of resources, accelerating the sustainable rate of economic growth.

Question 36

What does cost cutting and greater efficiency also lead to?

Answer 36

Cost cutting and greater efficiency also leads to reduced prices for goods and services (low inflation). This makes local firms more internationally competitive and increases export sales as well as incomes, thus cutting the structural CAD.

Question 37

In addition what does greater allocative efficiency and competitiveness cause?

Answer 37

In addition, greater allocative efficiency and competitiveness cause employment to grow (in the long term, despite the possibility of structural unemployment in the short term), and thus real incomes and material living standards rise.

Question 38

What does trade liberalisation promote?

Answer 38

It promotes a free trade marketplace. The concept of free trade is based on the belief that there are benefits to be gained from competition between nations and is aimed at improving international competitiveness.

Question 39

What are specific measures associated with trade liberalisation?

Answer 39

. Tariff cuts
. Reduced subsides and other assistance to local producers
. Abolition of import quotas and licenses
. Increased number of free trade agreements
. Other policy changes

Question 40

Explain the following specific measure associated with trade liberalisation: tariff cuts

Answer 40

Tariffs or import duties simply represent an indirect tax levied on selected imported goods. In general, tariffs are added on to the price of imports to make them dearer or less attractive to local consumers. There have been debates for years about the appropriate level of tariff protection for Australian industry.

Tariffs limit foreign competition and restrict the supply of goods and services in local markets, so many economics agree that high tariffs cause resources to be allocated inefficiently. into industries where we have a comparative cost disadvantage.

Question 41

What do high tariffs and weak competition mean?

Answer 41

High tariffs and weaker competition mean that local firms can remain inefficient and uncompetitive and still survive, and local households and businesses consuming Australian-made goods and services must pay higher prices for these items, reducing living standards.

Question 42

What do the problems of protection offset?

Answer 42

These problems of protection offset the gains from any possible increase in incomes and employment arising in the short term from having tariffs.

Question 43

What can also occur if one country increases its tariffs?

Answer 43

When one country raises its tariffs, this becomes a justification for other nations to retaliate and increase their protection. As a result, world trade volumes and domestic economic activity contract in the long term, reducing living standards.

Question 44

What are some tariff reduction figures? COME BACK

Answer 44

Look in booklets given to you and do research

Question 45

Explain the following specific measure associated with trade liberalisation: reduced subsidies and other assistance to local producers

Answer 45

Subsidies are government cash payments made to local producers to help them cover some of their production costs. They can enable Australian firms to export at a lower, more competitive price.

Question 46

What are some reduced subsidies and other assistance to local producers figures? COME BACK

Answer 46

Page 277 and booklets

Question 47

Explain the following specific measure associated with trade liberalisation: abolition of import quotas and licences

Answer 47

Page 277

Question 48

What are some abolition of import quotas and licenses figures?

Answer 48

Page 277 and booklets

Question 49

Explain the following specific measure associated with trade liberalisation: increased number of Free Trade Agreements (FTAs)

Answer 49

Page 277

Question 50

What has Australia increasingly tried to do given the slow pace of multilateral trade reform?

Answer 50

Australia has increasingly tried to negotiate bilateral free trade agreements (FTAs) with two or more individual countries.

Question 51

What are some of Australia’s FTAs?

Answer 51

• • one you must know in depth

Question 52

What are the aims of this type of trade reforms (FTAs)?

Answer 52

The aims include:
. Improving efficiency in resource allocation by directing resources into areas of comparative cost advantage
. Lifting the competitiveness of our exporters
. Establishing a business presence abroad
. Expanding Australia’s market share in overseas countries
. Delivering stronger economic growth
. Reducing costs paid for imports by local firms and the prices paid for imports by households
. and Making Australia a more attractive destination for overseas investment.

Question 53

What does the signing of FTAs also help to do?

Answer 53

Page 278

Question 54

Explain what ChAFTA is.

Answer 54

The China-Australia Free Trade Agreement (ChAFTA), which entered into force on 20 December 2015, builds on Australia’s large and successful commercial relationship with China, by securing markets and providing Australians with even better access to China across a range of our key business interests, including goods, services and investment. Trade and investment with China is central to Australia’s future prosperity.

My explanation:
ChAFTA is the China-Australia Free Trade Agreement (ChAFTA), which entered into force on the 20th of December 2015. China is Australia’s largest trading partner and ChAFTA builds on this large and successful commercial relationship. This is because it secures markets and provides Australians with even better access to China. As a result, China is expected to buy even more than $90 billion worth of Australian exports ($90 occurred in 2014/15).

Question 55

What are some ChAFTA figures?

Answer 55

More than 85% (rise to 93% in 2019 and 97.9% in 2029 - when ChAFTA is fully implemented) of Australia’s goods are exported to China ($90 billion value in 2014/15) now enter duty free or at preferential rates thanks to ChAFTA.

China buys more of Australia’s agriculture than any other country.

Dairy - tariffs up to 20% eliminated by 1 January 2026

Question 56

Explain the following specific measure associated with trade liberalisation: other policy changes

Answer 56

Page 278

Question 57

What are embargoes?

Answer 57

Rtf

Question 58

What happens in a free trade environment? COMEBCACK

Answer 58

In a free trade environment, the ready availability if imports expands competition in the domestic market, which means that domestic producers cannot raise….

Question 59

What do microeconomic reform policies involving trade liberalisation do?

Answer 59

Microeconomic reform policy involving trade liberalisation helps to lift allocative, technical and dynamic efficiency, grow Australia’s productive capacity and increase AS, resulting in impacts on on the government’s key economic goals.

Question 60

How does trade liberalisation lower cost inflation?

Answer 60

The adoption of freer trade and stiffer competition from imports has led to greater efficiency in resource allocation. Resources move into areas of comparative cost advantage or greatest efficiency.

As well as cheaper imports of new equipment and more efficient technology, this has helped to reduce local production costs and promote the goal of low inflation.

Question 61

How does trade liberalisation create stronger and more sustainable economic and employment growth?

Answer 61

With trade liberalisation there is increased competition from imports. This helps to strengthen allocative efficiency in the use of resources. In the long term, by directing resources into areas of comparative cost advantage, improved efficiency lifts the sustainable rate of economic and employment growth.

More output or GDP is gained from the same inputs. Even so, it is possible that lower tariffs (such as those in 2010), the signing of more FTAs and stronger competition from imports may, in the short-term, lead some businesses to close, causing structural unemployment. As a result, pro- ductive capacity and GDP may temporarily shrink.

Question 62

How does trade liberalisation effect external stability and the CAD?

Answer 62

Trade liberalisation has helped to improve Australia’s allocative, technical and dynamic efficiency in the use of resources, thus lowering production costs.

In the long term, this has probably helped to strengthen the international competitiveness of Australian export and import-competing firms, thus tending to lower the structural CAD and promote better external stability.

In addition, the increased number of bilateral free trade agree- ments is likely to grow the size of our export market and thus help to reduce the size of Australia’s CAD.

This is because the abolition of overseas tariffs on Australian exports makes them more attractive to foreign customers, increasing sales and export incomes.

However, in the short term it is possible that the shift towards freer trade (for example, lower tariffs that made imports relatively cheaper) has led to more imports, a bigger CAD and reduced external stability.

Question 63

How does trade liberalisation change the distribution of income?

Answer 63

In the long term, trade liberalisation should have helped to increase equity in income distribution and living standards.

This is because these policies often lead to greater efficiency and production, lower cost inflation and cheaper goods, higher real incomes and increased purchasing power.

However, in the short term, individuals who became structurally unemployed when local firms closed down due to competition from cheaper imports may suffer reduced real incomes, equity and living standards.

Question 64

Explain the nature and operation of supply-side budgetary policies.

Answer 64

Budgetary polices involve changes in the level and composition of budget receipts and expenses. Particular budget receipts budget receipts, outlays and outcomes may also be effectively used to improve our long-term levels of technical, inter-temporal, allocative and dynamic efficiency, grow productive capacity and lift aggregate supply.

When this occurs, cost inflation is slower, sustainable economic growth stronger, struc- tural unemployment lower, and our international competitiveness and external stability enhanced. Ultimately, achieving these government economic goals helps to raise Australian incomes and living standards.

Question 65

More on supply-side budgetary polices.

Answer 65

If budgetary policies are used to increase efficiency and grow Australia’s productive capacity and aggregate supply from AS1 to AS2, this boosts national pro- duction and employment from GDP1 to GDP2. At the same time, this slows cost inflation from P1 to P2. Also, under these conditions, incomes are higher, purchasing power is greater, the international competitiveness of local firms is stronger, the CAD is smaller and living standards are superior.

Question 66

What can the government use to grow aggregate supply?

Answer 66

. Tax reform in the budget
. Budget outlays on infrastructure
. Budget outlays in education and training
. Budget taxes along with outlays on welfare and childcare (increases labour force participation too)

Question 67

Explain how tax reform is used in the budget to grow aggregate supply.

Answer 67

Various governments have recognised that periodically, the tax system needs to be reformed. Indeed, governments can alter:
. the tax mix (that is, whether most revenue comes from direct taxes like personal or company, or indirect taxes such as excise or tariffs),
. change tax rates (the tax burden),
. introduce new taxes
. and redirect how tax revenues are used.

Question 68

What has happened over the past few years with tax reform?

Answer 68

In particular, during the last few years to 2013, the federal government continued to lower some tax rates to help increase efficiency. Many economists believe that this helps to increase the incentives to work hard and invest more in new equipment and technology that lifts efficiency and expands business capacity.

In turn, these incentives help to strengthen economic growth, reduce structural unemployment (caused by firms closing due to poor after-tax profits), lower cost inflation, bolster international competitiveness, depress the CAD, lift incomes and grow living standards.

Question 69

Explain how reducing personal tax income rates (PAYG) can improve work incentives.

Answer 69

Many economists argue that lower income tax rates like these can help to improve personal effort and the motivation to work hard or seek longer hours.

This helps to increase work output and labour efficiency, build productive capacity, and add to the level of aggregate supply and the sustainable rate of economic growth.

Similarly, lower PAYG tax rates increase personal rewards for gaining extra skills, training or job promotion.

Again this helps to build aggregate supply. Moreover, lower income tax rates can stimulate individuals to participate in the labour force, rather than rely on welfare benefits where there is a burden on taxpayers.

Lower rates here also help to avoid the ‘brain drain’ caused by our talented labour force being seduced abroad by offers of higher income and lower tax rates.

Question 70

What could failure to cut our income tax rates do?

Answer 70

Hence, failure to cut our income tax rates could diminish the quality of our human capital, lower efficiency and erode Australia’s productive capacity and living standards.

Additionally, unless PAYG tax rates are reduced over time, rising incomes mean a growing tax burden as individuals move into higher tax brackets. This is called ‘bracket creep’. Without reductions in tax rates, there are greater disincentives to efficiency and work effort.

Question 71

What are examples of tax reductions/cuts in the 2016/17 budget? COME BACK

Answer 71

Company tax: 30% to 28.5% (and eventually to 27.5%)

Question 72

Explain how cutting company and capital gains tax rates can create investment incentives.

Answer 72

Lower rates of company and capital gains taxes both help to create powerful inducements for businesses to invest in new plant, equipment and technology.

This is because after-tax profits are higher. As a result of better returns, profit-hungry firms and individuals allocate resources to improve efficiency and grow their productive capacity. This helps to make local export and import-replacing firms even more internationally competitive, improving external stability.

In addition, lower company tax rates locally help to attract extra investment from abroad. This strengthens efficiency, productive capacity, employment, incomes and living standards.

Question 73

What could high company or capital gains tax do?

Answer 73

By contrast, high company or capital gains tax rates relative to those prevailing among our trading competitors make local firms uncompetitive in both domestic and international markets, destroy jobs causing structural unemployment, and slow economic and income growth.

Question 74

What can lower rates of indirect taxes do?

Answer 74

Lower rates of indirect tax can lift efficiency in resource allocation. Lower rates of indirect tax, including tariffs and excise duties, can help to increase efficiency in resource allocation by reducing the distortions caused by government intervention.

For instance, lower tariff rates on imports force resources to be used more efficiently and allocated into areas of comparative cost advantage. Lower tariffs also force local firms to cut costs through structural change, slowing cost inflation.

Question 75

What can higher rates of indirect taxes do?

Answer 75

However, by contrast, high tariffs only result in the misallocation of resources to areas of greatest inefficiency and weakness. This holds back economic growth, adds to inflation, reduces purchasing power and undermines Australian living standards.

Question 76

Explain how the government uses outlays on infrastructure to grow aggregate supply.

Answer 76

Infrastructure mostly involves capital equipment that is used to produce goods and services such as roads, railways, airports, electricity, telecommunications, and water supply. These things are regarded as economic infrastructure.

Additionally, social infrastructure makes a valuable contribution to these outcomes. It refers to the provision of education and training (schools, universities, research facilities, TAFE colleges and libraries), as well as hospitals.

Question 77

What does infrastructure provide?

Answer 77

Infrastructure provides the vital surroundings or economic climate needed for:
• increasing efficiency in the use of our resources,
• improving the international competitiveness and profitability of Australian businesses needed for growing jobs
• growing productive capacity (shifting the AS line outwards and to the right), including domestic and export capacity
• boosting the sustainable rate of economic growth
• improving Australian living standards

Question 78

Why has a spotlight been put on infrastructure bottle necks?

Answer 78

Australia’s economy running near full capacity. This is because it:
. limits aggregate supply
. undermines our international competitiveness
. slows the sustainable rate of economic growth
. and restrict improvements in our incomes and living standards.

Question 79

What is economic and social infrastructure?

Answer 79

Economic infrastructure - involves the provision of capital equipment, such as roads, railways, telecommunications and water supply, often by governments, that is mainly used collectively by firms to produce other goods and services.

Social infrastructure - focuses on the provision of collective community services, such as education and health.

Question 80

What are two problems with our infrastructure/bottlenecks?

Answer 80

1. The rising average age of our public infrastructure (rose from less than 18 years to more than 20 years). Due to inadequate levels of government investment spending and a tendency to allow these assets to run down.
2. The ability of our infrastructure to support economic activity is well behind that of leading or advances economics such as Germany, France and the U.S.

Question 81

What are supply shortages indicated by?

Answer 81

Usually, supply-side shortages in markets are indicated or signalled by rising prices and increased profitability. This attracts extra resources into this area of production.

However, despite recent federal, state and local government reforms some infrastructure markets (such as urban and rural water, power, road and rail transport, and gas) are still not perfect or responsive in this way.

Here, price signals coming from markets are not always effective in allocating extra resources into these uses.

Question 82

What is some infrastructure spending (G2) announced in the 2016/17 budget?

Answer 82

. $857.2 million for the Melbourne metro rail project
. $115 million in the next two years for the Badgerys Creek airport (a second airport for Sydney)
. $594 million boost to an inland freight rail link through Victoria, NSW and Queensland
. $2 billion in loans for dams and other water infrastructure

Question 83

What does Government investment spending act to do?

Answer 83

It acts to stimulant AD, economic growth and jobs in the short-term. However, in the long-term it provides supply-side benefits to the economy by increasing productivity and expanding the productive capacity of the economy.

Eg. Quality rail and roads should reduce travel times and fuel costs, improving the willingness and ability of businesses to supply goods and services. The corresponding increase in aggregate supply serves to promote higher rates of non-inflationary economic growth.

Question 84

How can new infrastructure promote the goal of external stability?

Answer 84

High-quality infrastructure contributes to productivity growth which drives down the average costs of production. These lower costs of production can be passed on to costumers as lower prices in domestic or overseas markets.

Lower prices raise the international competitiveness of Australia’s tradable sector and their share of global trade. This acts to boost export credits relative to import debit in the Current Account, which in turn lowers the Current Account Deficit.

A smaller CAC means that less needs to be borrowed from overseas to fund the CAD, which helps to restrain growth in Australia’s NFD.

Question 85

What other problems does infrastructure have?

Answer 85

. There are often long lead times involving many years between recognising a bottleneck and implementing policies to correct this problem.
. Demand for some infrastructure can change quite quickly, as we have recently seen in connection with recent mining booms. T
. The other worry is that while returns on some infrastructure investment can be very attractive, even to the private sector (or perhaps in partnership with government through public–private partnerships or PPPs) this is not always the case (especially in those instances where there are positive externalities that benefit society generally).

Question 86

What happens to some infrastructure projects?

Answer 86

For some infrastructure projects, low profits in the short term cause them to become relatively unattractive. With this background in mind, we now turn our attention to how the budget can address infrastructure bottlenecks, lift efficiency, build productive capacity, increase AS and improve society’s living standards.

Question 87

What does providing infrastructure usually mean?

Answer 87

Providing infrastructure usually means that there must be budget outlays to allocate resources towards government capital or investment spending (G2).

Although this expenditure affects the level of aggregate demand (AD = C + I + G1 + G2 + X – M), it also grows productive capacity and aggregate supply.

Question 88

What are public-private partnerships?

Answer 88

Public–private partnerships (PPPs) occur when the government works with the private sector to build infrastructure such as a tunnel or major road.

The private sector may, for example, fund the building, maintenance and operation of the facility, but the government would lease these back for periods up to 30 years.

Question 89

Explain how budget outlays on education and training grow aggregate supply.

Answer 89

Government budget outlays on education and training can affect the efficiency of Australia’s labour resources. In turn, this helps to determine our nation’s productive capacity or aggregate supply.

Eg. in recent years there have been labour bottlenecks caused by a shortage of skilled and educated workers in areas like the trades, health, medicine and engineering.

Question 90

What does the budget use in education and training projects?

Answer 90

The budget uses both capital (for example, buildings and equipment) and operating outlays (such as, payment of staff and supplies) on education to lift educational and training standards and improve school retention rates.

Year 12 school retention rates: 78% in 2001 to 85% in 2011,
Tertiary study rates: 9% in 1971 to 29% in 2001 and 33% by 2011.

As an aggregate supply policy, all this can be expected to:

Question 91

What happens without a suitably qualified labour force?

Answer 91

Without a suitably qualified labour force, industry cannot expand and capacity will be limited.

Question 92

What is aggregate supply policy of education and training expected to do?

Answer 92

As an aggregate supply policy, all this can be expected to:
• grow the skills and productivity of the labour force so there is more output per hour worked
• reduce production costs for firms
• strengthen our international competitiveness and export sales abroad
• improve employability through retraining and reduce structural unemployment
• ease labour bottlenecks or shortages
• grow Australia’s productive capacity, aggregate supply, sustainable rate of economic
growth and incomes
• lift Australia’s material and non-material living standards.

Question 93

Education and training figures from the 2016/17 budget.

Answer 93

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Question 94

What can supply-side aspects of budgetary policy do?

Answer 94

Supply-side aspects of budgetary policy, including cuts in tax rates, infrastructure outlays, changes to welfare and measures to increase national savings, can all be used effectively to grow Australia’s productive capacity and the AS line.

In turn, this will generally help to better achieve the government’s key economic goals and grow living standards.

Question 95

Explain how supply-side aspects of budgetary policy slow cost inflation.

Answer 95

Supply-side budgetary policies can help slow cost inflation in several ways.

. Reductions in tax rates can slow cost inflation. Lower rates of personal income tax can perhaps lead to increased worker incentive or efficiency, along with reduced wage-cost pressures.

. Reduction in the rate of company tax lifts after-tax profits, allowing companies to reduce their selling prices, and encourages firms to invest in new equipment and more efficient technology. Cutting tax rates as promised would also help slow cost inflation pressures.

. Infrastructure outlays on communications (such as the NBN), transport and education could also help to lower production costs by boosting efficiency, again leading to lower cost inflation.

. Budget measures to promote higher levels of national savings may help depress interest rates on credit paid by firms, again allowing them to cut costs and keep prices down.

Question 96

Explain how supply-side aspects of budgetary policy create faster and more sustainable rates of economic as well as employment growth.

Answer 96

Supply-side aspects of budgetary policy can also help bolster the sustainable rate of economic growth.

. Increased efficiency and lower cost inflation may result from lower tax rates. Some argue that lower tax rates create stronger personal incentives for people to work hard and for firms to expand their investment in new equipment. This lifts both technical and dynamic efficiency, grows our productive capacity and accelerates Australia’s sustainable rate of economic growth.

. In addition, using budget outlays to pump more resources into national infrastructure projects and education also helps to grow Australia’s productive capacity, as do budget measures aimed at raising the labour force participation rate. Again the sustainable rate of economic growth can be faster and living standards higher.

Question 97

Explain how supply-side aspects of budgetary policy effects international competitiveness and the CAD.

Answer 97

Lower company and PAYG tax rates, measures to encourage national savings and government infrastructure and education outlays as aggregate supply-side measures in the budget can all help to strengthen our international competitiveness and improve external stability, partly by lifting efficiency and slowing cost inflation.

. Greater efficiency and lower costs should make local producers more competitive both in Australia and overseas, allowing them to sell exports and compete in local markets against imports.

. In addition, infrastructure projects involving water, power, transport and communications can help to ease bottlenecks currently limiting production, grow our export capacity, reduce the structural CAD and thus help Australia to better achieve external stability.

Question 98

Explain how supply-side aspects of budgetary policy can change income distribution.

Answer 98

Supply-side budgetary measures that boost efficiency such as lower rates of company tax, infrastructure projects and encouragement of national savings, can help to slow cost inflation and hence raise the purchasing power of family incomes.

As a consequence, basic goods and services become cheaper and more affordable, promoting greater equity in income distribution.

These measures can also help improve business conditions and after-tax profits, reducing the level of business closures.

In turn, this should lower structural unemployment, lift disposable income and strengthen living standards.

Question 99

Explain the nature and operation of immigration policy.

Answer 99

These days, Australia’s immigration policy is a strategic supply-side approach to managing the number and composition of migrants coming to Australia from overseas.

In other words, apart from important humanitarian and family considerations, the federal government’s current immigration program especially tries to attract young, English-speaking and suitably skilled people who are likely to make a very valuable and ongoing economic contribution to the labour force and the Australian economy.

Question 100

What is immigration policy?

Answer 100

This is a key aspect of aggregate supply side polices. The aim is to manage the number and composition of migrants to best support future economic growth.

Question 101

What does Australia’s immigration policy continue to emphasise?

Answer 101

Australia’s immigration policy continues to emphasise the building of our nation. A central feature of this strategy remains the immigration target. This places a desired limit on the number of new arrivals accepted by the Department of Immigration and Citizenship. The target is then broken down into three sub-categories.

Question 102

What is the immigration target?

Answer 102

The immigration target represents the desired level of immigration (with sub-categories including skilled, family and humanitarian).

Question 103

What are the three sub-categories of the immigration target?

Answer 103

1. The skilled stream
2. Family migrant stream
3. Humanitarian migrant stream

Question 104

What is the skilled migrant stream?

Answer 104

The skilled migrant stream has four sub-categories.
– General skills migration based on a points system (here points are awarded based on those likely to make the greatest economic contribution based on criteria like work experience, age and education)
– Employer-sponsored migration program (employers can recommend selected people who have the particular skills they seek, and these people can become permanent residents)
– Distinguished talent (for those who have international recognition in their field of expertise)
– Business innovation and investment program (for those with financial backing and who have previously set up successful businesses)

Question 105

What is the family migrant stream?

Answer 105

This enables family reunification of, for example, spouses, children and parents.

Question 106

What is the humanitarian migrant scheme?

Answer 106

This includes refugees.

Question 107

Why might the recruitment of sufficient skilled immigrants become more difficult to sustain?

Answer 107

Because Australia is one of many countries seeking suitable migrants, our immigration program needs to compete with those abroad.

Question 108

Explain how immigration policy increases Australia’s labour force size, skills, participation and employment.

Answer 108

Clearly immigration policy offers a fairly quick and easy solution to labour shortages.

Immigration policy also has other effects on Australia’s labour market. It has helped to ease critical skills shortages that restricted productive capacity and aggregate supply.

In addition, without a large intake of trained migrants, Australia would be losing more than 35 000 skilled people each year overseas as a result of permanent departures (a brain drain) by our nationals, creating even worse labour shortages.

Another impact of recent immigration on the labour market is that it has helped to increase the labour force participation rate.

Finally, some people feel that immigration might tend to increase the unemployment rate. This is not generally Australia’s experience. Usually, recent immigrants have had a lower unemployment rate than that of other members of the labour force.

In addition, while migrants certainly do increase the supply of labour perhaps adding to unemployment, they also add even more to the demand for goods and services, creating additional job vacancies and hence lower unemployment.

Question 109

What can effect the shape of population pyramids?

Answer 109

Normally when graphed, a country’s age–sex distribution is a fairly regular shaped pyramid where the sides slope inwards as age increases. This is because as we move towards the top of the graph, increasingly fewer people survive accidents, sickness or older age.

However, irregularities do occur in the pyramid’s shape. Often these are due to:
. social factors (such as family size, acceptance and use of effective contraceptives, and the roles of women)
. economic events (a depression or the cost of having children)
. and political developments (such as wars and changes in immigration policy) in Australia and overseas.

Question 110

What is an ageing population?

Answer 110

Australia has an ageing population. This means that a growing proportion of the population is in older age groups nearing or beyond retirement. If no action is taken to correct the ageing of the population, perhaps through immigration, serious economic problems will arise.

An ageing population is expensive for federal governments who need to provide welfare benefits for the aged and the latest costly medical treatments. Second, an ageing population where there are fewer young people working means that the labour force is growing more slowly, resulting in labour shortages.

Question 111

What could increased welfare benefits for the aged and costly medical treatments lead to?

Answer 111

These could lead to restrictions on Australia’s productive capacity and aggregate supply, slowing our sustainable rate of economic growth.

Labour shortages can also lead to higher wage costs and mounting inflationary pressures. They also mean that there are fewer taxpayers of working age, again weakening the federal government’s financial position.

If nothing is done about these worries, they may eventually lead to rising budget deficits or reduced living standards for the growing number of ageing Australians.

Question 112

Explain how immigration policy increases sustainable rates of economic growth.

Answer 112

Indeed, immigration helps to increase the size of Australia’s production possibility frontier (potential annual output of goods and services) because it grows the quantity and quality (skills and efficiency) of our labour resources.

Immigration (especially skilled migration) helps to grow the aggregate supply line from AS1 to AS2. This increases the sustainable level of national production from GDP1 to GDP2. It also helps to lower wage–cost pressures, slow inflation and cause the general price level to fall from P1 to P2.

In turn, these changes should also lead to higher incomes, more purchasing power and equity, less cost inflation, stronger international competitiveness and, ultimately, better material living standards.

However, although immigration can expand our productive capacity, some economists have drawn attention to the effects of immigration on Australia’s environment and the impact that more rapid population growth has on water, land for housing, non-renewable natural resources, urban congestion, waste disposal and greenhouse gas emissions. These adverse environmental impacts could reduce our non-material living standards.

Question 113

What would happen without immigration?

Answer 113

Without immigration, the size and skills of Australia’s labour force would have been in decline since 2010, so immigration is needed to continue to grow our labour force, increase our productive capacity, level of aggregate supply, sustainable rate of economic growth and future living standards.

Question 114

Explain how immigration policy reduces cost inflation?

Answer 114

Whether immigration lessens or worsens inflation depends on its effect on the level of aggregate demand versus aggregate supply and the time period considered.

In some ways, immigration might slow cost inflation in the long term. Firstly, it increases the supply of workers by adding to the size, participation and skill of the labour force. When the economy is near its capacity, this can help to ease labour shortages.

As a result, wages should rise more slowly than otherwise, reducing cost inflation. Secondly, for some Australian firms, the small size of the local market (only around 23 million people) places them at a cost disadvantage.

In this respect, immigration has quickly grown the size of the domestic market for goods and services. This allows local firms to produce on a bigger, more efficient scale with larger production runs.

Business fixed costs (such as product development, machinery and advertising) can be spread more thinly over more units of output, allowing greater economies of large-scale production, with lower costs and cheaper consumer prices.

Question 115

How might immigration policy contribute to inflationary pressures?

Answer 115

However, it is also possible that immigration could contribute to inflationary pressures by adding to the demand for resources, goods and services more than it adds to their supply. Here for example, we might think of the specific impact that immigration has had in pushing up property prices and reducing housing affordability for Australians.

Question 116

Explain how immigration policy effects the unemployment rate.

Answer 116

Immigration can both add to and reduce Australia’s unemployment rate, depending on whether we are looking at the aggregate supply-side effects or the aggregate demand- side impacts.

. On the one hand, immigrants are an aggregate supply factor and grow the size of our labour force. They also often have a higher participation rate than others. One would normally expect that this would tend to increase our unemployment rate. Indeed, there is some evidence of this, particularly those whose English language and vocational skills are limited and who have only recently arrived. However, the rate falls with time. Moreover, migrants from some areas and countries are more likely to be unemployed than the locally born, while those from other regions of the world can have unemploy- ment rates below that of other Australians.

. On the other hand, immigration also helps to reduce our unemployment rate because migrants also become consumers of goods and services, adding to aggregate demand, economic activity and the demand for labour. This would tend to reduce Australia’s level of cyclical unemployment.

Question 117

Explain how immigration policy effects the balance of payments, CAD and external stability.

Answer 117

Immigration may have mixed effects on the size of Australia’s CAD.

. On the one hand, by growing the size, skills and labour force participation rate, immigration is likely to help increase Australia’s GDP and export capacity, thus reducing the structural CAD. Immigration also helps to keep wage costs lower than otherwise, thus helping to improve the international competitiveness of Australia’s exports relative to imports, perhaps lowering the structural CAD. In addition, most immigrants transfer their savings to Australia, bringing additional credits on the capital account.

. However, it is possible that immigration may result in increased debit transactions such as those associated with imports of goods (food and clothing, for example) and services (such as travel), and perhaps even extra income payments abroad to family members or relatives in their country of origin. In this case, the size of the CAD could rise.

Question 118

Explain how immigration policy effects income distribution.

Answer 118

Some argue that immigrants, especially those with poor English language skills or who are unskilled, are generally likely to be on lower incomes than the population generally.

Higher unemployment rates for this group also reduce their incomes and living standards and puts strain on the welfare system. Additionally, some claim that by doubling population growth rates, immigration has made housing more expensive and less affordable for lower income earners, reducing access to basic goods and services for others.

An alternative view is that skilled migrants with generally higher participation rates and education are likely to be on higher incomes. Therefore the overall the impact on income distribution may not be large.

Question 119

Immigration policy figures.

Answer 119

2015/16: (double check this)
. 128,550 places for skilled migrants
. 57,400 places for family migrants
. 565 places for humanitarian migrants

Question 120

Explain the nature and operation of environmental policy as an influence on aggregate supply.

Answer 120

A lot of concern has been expressed in the last few years about environmental issues like:
• rising greenhouse gas emissions including CO2 and global warming, melting of the polar ice caps and rising sea levels endangering island and coastal communities
• severe weather events including floods, cyclones, prolonged drought and bushfires that cause loss of life, destroy infrastructure and productive capacity
• destruction of the ozone layer, deteriorating air quality and waste disposal issues
• acid rain and toxic substances entering our food chain
• deforestation
• the lack of healthy environmental river flows and
• destruction of biodiversity and the resulting extinction of plant and animal species.

Question 121

What are greenhouse gas emissions?

Answer 121

Greenhouse gas emissions include methane, nitrous oxide, sulfur hexafluoride and hydrofluorocarbons released into the atmosphere as a result of economic activity and the burning of fossil fuels.

Most people believe that these gases are also contributing to global warming, melting of the polar ice caps, rising sea levels and extreme weather events like droughts, fires, floods and storms.

Question 122

What is climate change?

Answer 122

Climate change refers to unusual variations in average global temperatures and the distribution of rainfall. Most research suggests that global warming is connected with rising levels of economic activity and associated increases in CO2 emissions due to the burning of fossil fuels.

Question 123

What are environmental polices?

Answer 123

Environmental policies, such as the Direct Action Plan, which are designed to reduce of mitigate environmental destruction caused by economic activity as well as the production and consumption of goods and services.

Question 124

Explain how environmental damage is a negative externality and an example of market failure.

Answer 124

There is one type of input that has not been properly costed into selling prices and calculations of profits. These inputs are environmental resources, such as clean air, water and soils. Until recently, these were usually seen as so abundant that they were available free of charge to use, but often such resources were misused.

When economic activities cause the environment’s quality to be depreciated, this is an instance of market failure resulting in negative environmental externalities (costs that are created by businesses that have simply been passed onto others and future generations).

Question 124

What are negative environmental externalities?

Answer 124

Negative environmental externalities represent the costs to the environment that are created by producers and consumers as a result of economic activity such as pollution, resource depletion, destruction of natural beauty spots, urban congestion and crime that have simply been externalised or passed onto others and future generations.

Question 126

What is an obvious way to protect the environment?

Answer 126

An obvious way to protect the environment is to create a market so that firms depleting or abusing environmental resources will incur a cost that erodes their profits.

Question 127

What might environmental strategies help to do?

Answer 127

In particular, environmental strategies might help to:
• mitigate or reduce the severity of weather events and the damage resulting from climate change (for example, the massive insurance claims and loss of life)
• protect rural production from the devastating effects of drought, floods, fires and storms resulting from climate change
• avoid the destruction of low-lying coastal communities and cities from rising sea levels as a result of global warming
• create new investment, business expansion and jobs in low-emission industries using clean technology
• keep up with other countries’ efforts to mitigate damage associated with climate change.

Question 127

What is one major government environmental policy from the past four years that might impact on some of the government’s key economic goals?

Answer 127

The direct action plan.

Question 128

What is the direct action plan?

Answer 128

The Direct Action Plan is the Governments overarching plan to reduce Co2 emissions by 5% on 2000 levels by the year 2020.

The key policy initiatives which will drive the achievement of this goal are:
. Emissions Reduction Fund AND
. Clean Energy (under the management of the Clean Energy Finance Corporation).

Question 128

More on direct action plan.

Answer 128

The Direct Action Plan is a replacement to the Labour Government’s Carbon Tax and instead provides financial incentives for polluters to reduce emissions. The centrepiece of this policy is the Emissions Reduction Scheme.

The Direct Action Plan aims to reduce greenhouse gas emissions to 5 per cent below 2000 levels by 2020. This plan also involves creating a 15,000 strong Green Army to conduct conservation work.

Question 129

What is the emissions reductions fund and how does it work?

Answer 129

The Emissions Reduction Fund is the centrepiece of the Government’s climate action policy. It will work with other incentives under the Direct Action Plan to help meet Australia’s target of reducing emissions by five per cent below 2000 levels by 2020.

It operate alongside existing programmes that are already working to reduce Australia’s emissions growth. The Government has provided $2.55 billion (2014) to establish the Emissions Reduction Fund, with further funding to be considered in future budgets.

The fund will call for businesses to submit tenders for projects that will either lower emissions or offset them. It will then operate as a reverse auction (businesses compete and undercut each other to win a contract and with it, the Government’s money).

Question 130

What will the clean energy regulator do?

Answer 130

The clean energy regulator will run four auctions a year. The government will buy those carbon credit units (Payment comes via clean energy regulator).

Question 132

Summarise the emissions reduction fund.

Answer 132

The gov has committed $2.55 billion over 4 years to reduce CO2 emissions via the E.R.F.
. The E.R.F. is one arm of the Direct Action Plan. The other arm is invested in renewable energy (clean energy corporation).
. The E.R.F. works via reverse auctions.
1. Firms put in tenders (bids) to show how they could reduce CO2 emissions.
2. The gov authority will determine which tenders or projects are the most cost effective.
3. The gov pays (subsidies) those businesses to introduce the intiriatuve

Question 133

What are the effects of the direct action plan on the government economic goals?

Answer 133

Inflation - ⬆️ subsidies = ⬇️ costs = ⬇️ prices = ⬇️ cost inflation = ⬆️ buying power and therefore living standards rise too.

Economic growth - more favourable aggregate supply-side conditions (⬇️A⬇️C⬆️E) = encouraged production (AS line shifts to the right) = ⬆️ economic growth (may actually help us enjoy better material and non- material living standards than would otherwise be possible) = In the long-term, it should enable Australia to grow its aggregate supply with less environmental damage, and ultimately sustain better material and non-material living standards.

Full employment - as a result of some firms being able to ⬇️ prices (due to subsidies), other businesses may lose customers and close down = ⬆️ structural unemployment in the short term. However, with ⬆️ AS and in turn ⬆️ sustainable economic growth = increased employment in the long term.

External stability - ⬇️ prices = ⬆️ international competitiveness = ⬆️ credits and ⬇️ debits for net goods and services in the current account = ⬇️ CAD = ⬇️ reliance on overseas borrowing = ⬇️ NFD = Australia living within its means (external stability).

Equity in income distribution - ⬇️ prices = ⬆️ equity however ⬇️unemployment in the short term = ⬇️ equity.

Question 134

When pursuing the key economic goals, what does the Australian government do?

Answer 134

When pursuing its key economic goals, the Australian government seldom uses its aggregate demand policies or aggregate supply policies in isolation.

Rather, it tries to employ the most effective combinations or mixtures of these two strategies to help achieve low inflation, strong and sustainable economic growth, full employment, external stability and an equitable distribution of income. This blend of measures is called the policy mix.

Question 135

What is the direct action plan seen as from a supply-side perspective?

Answer 135

From a supply-side perspective the direct action plan is inefficient in that it relies on government subsidies to reduce CO2 emissions.

Therefore, in the short term it can be argued that the Direct Action Plan (D.A.P.) reduces or slows the growth in AS, but in the long term by preserving the environment the D.A.P. and global equivalent policies allow for AS growth to continue by preserving current land resources.

(Think ⬇️ arable land due to ⬆️ temperature + more severe weather events and possible seas level rises).

Question 137

What are examples of projects that will either lower emissions or offset them?

Answer 137

. Upgrading commercial building and vehicles (eg. Putting in insulation = less heaters needed = ⬇️ CO2 emissions).
. Improving energy efficiency of industrial facilities and housing.
. Reducing electricity generated emissions.
. Capturing land fill gas (controversial).
. Reforest info and revegetating marginal lands.
. Reducing coal mine waste gas.

Question 138

What is policy mix?

Answer 138

Policy mix refers to the combination of aggregate demand policies and/or aggregate supply policies that the government uses to pursue particular economic goals and improve living standards.

Question 139

What are compatible policies and conflicting policies?

Answer 139

Compatible policies are a combination of government measures that reinforce each other and work in complementary ways to help pursue a particular economic goal.

Conflicting policies are a combination of government measures that undermine or work against each other in pursuing a particular economic goal.

Question 140

What is the relationship between aggregate supply and macroeconomic demand policies in the current policy mix?

Answer 140

AD - monetary policy - 1.5% expansionary

  - budgetary policy - $39.9 2015/16 (actual) 
                                - $37.1 2016/17 (forecast - mildly contractionary)

AS - budgetary supply side - Infrastructure

  - microeconomic policy - Trade Liberalisation (ChAFTA)
  - immigration policy 
  - environmental policy - long term goal to ⬆️AS 

All AS initiatives have the goal of increasing AS - therefore compatible

Note: the forecast budget outcome for 2016/17 is seen as mildly contractionary, however, the final budget outcome for 2016/17 may well be a larger deficit than 2015/16 (which would be expansionary). This may arise due to decreased company profits and therefore decreased company tax collections.