unit 4 topic 2: economic management

Question 1

what is the difference between direct and indirect tax?

Answer 1

direct: taxpayer pays directly to the government (eg. income/company)
indirect: one that can be passed on-or shifted-to another person or group by the person or business that owes it (eg. gst)

Question 2

what is the difference between proportional, progressive and regressive tax?

Answer 2

progressive: % payable tax increases alongside increases in income (higher for higher income earners)
proportional: taxes remain constant no matter income group
regressive: taking a larger percentage of income from low-income earners than from middle- and high-income earners

Question 3

what is the governments other income source other than taxes?

Answer 3

dividends from government enterprises and selling assets

Question 4

what are two ways the government tend to spend their money?

Answer 4

capital: develop machines, infrastructure, health and education
transfer payments: payments to people in the form of cash social welfare payments

Question 5

define automatic stabiliser with example

Answer 5

tax/expenditure that operate without government action, they just occur or change with the economic cycle.
eg. income tax, pensioner benefits

Question 6

define discretionary spending

Answer 6

governments making deliberate decisions to influence aggregate demand (eg. funding national defence)

Question 7

define inflation targeting

Answer 7

medium-term average band that inflation should be maintained at (2-3% in australia)

Question 8

define supply-side policies

Answer 8

way of creating microeconomic reform in order to improve productivity and efficiency of production (eg. investment in education to improve workers skills)

Question 9

define domestic macroeconomic objectives

Answer 9

maximise standard of living and achieve stable economic growth

Question 10

what are the six key economic objectives

Answer 10

1. sustainable economic growth
2. internal stability (unemployment/inflation)
3. external stability (exports/imports)
4. improve standards of living
5. equal distribution of income and wealth
6. efficient resource allocation (sustainable development)

Question 11

what is the difference between headline and underlying inflation?

Answer 11

headline: the percentage change in prices over time measured by the CPI
underlying: the headline inflation but excluding one-off or any type of seasonal factors that cause short term volatility

Question 12

why would the RBA wish to keep inflation between the 2-3% target range?

Answer 12

1. maintain value of money
2. protect value of savings
3. keep interest rates low
4. boost business and consumer confidence
5. protect international competitiveness
6. protect equitable distribution of income

Question 13

what are the main forms of macroeconomic policy intervention?

Answer 13

1. fiscal policy - change in G and T to influence AD and AS
2. monetary policy - control over money supply and cash rate to influence AD
3. external policy - change to influence international payments and reciepts like tariffs and exchange rates
4. microeconomic reform policy - changes intended to influence competition and efficiency like labour productivity and technological innovation.

Question 14

what are the main forms of macroeconomic policy intervention?

Answer 14

1. fiscal policy - change in G and T to influence AD and AS
2. monetary policy - control over money supply and cash rate to influence AD
3. external policy - change to influence international payments and reciepts like tariffs and exchange rates
4. microeconomic reform policy - changes intended to influence competition and efficiency like labour productivity and technological innovation.

Question 15

elaborate on the three possible fiscal stances

Answer 15

contractionary: revenue > spending (surplus)
neutral: revenue = spending (balanced)
expansionary: revenue < spending (deficit)

Question 16

what are some key problems with fiscal policy

Answer 16

• time lags: regonition, decision-making, implementation
• increased employment means increased inflation (tradeoff)
• clash of objectives eg. making income distribution equitable may be a disincentive for people to work more because they know it just means they have to pay more tax
• contagious global influences
• political contraints (promise something just for an election, short term)
• often creates a lot of debt

Question 17

what are some key benefits of fiscal policy

Answer 17

• fastest of all the policies (has smallest outside time lag)
• can often directly target specific objectives
• commonly used in more volatile economic times eg. covid 19 as it can bring an economy out of a downturn much faster than changing the cash rate or increasing production

Question 18

what are some key benefits of monetary policy

Answer 18

• initial inside time lag is much quicker taking only a day to change the cash rate
• flexibility of change (could change it by 10 basis point or 80)

Question 19

what are some key problems of monetary policy

Answer 19

• outside time lag is massive sometimes up to 2 years
• combating inflation with it could make it worse (increase IR means increased business prices to compensate for the money they need to borrow and therefore increasing prices overall)

Question 20

what are some examples of supply-side policies (microeconomic reform)

Answer 20

gas tax cuts, social welfare payments, expansions in infrastructre and education investment, privatisation, tax liberalisation

Question 21

how does the increase in demand and supply affect prices in terms of microeconomic reform?

Answer 21

the price will decrease overall (think of the diagram)