Unit 6: The Economic Environment

Question 1

What are the two levels of economic theory?

Answer 1

1. Microeconomics
2. Macroeconomics

Question 2

What is microeconomics?

Answer 2

Microeconomics is the study of decisions that people and businesses make regarding the
allocation of resources and prices of goods and services.

Question 3

What must microeconomics take into account?

Answer 3

• Supply and demand and other forces that may impact the price levels in the economy.
• Taxes and regulation created by governments.

Question 4

What is an example of microeconomics?

Answer 4

Determining how a specific company could maximise its production and capacity so that it could lower prices and better compete in its industry.

Question 5

What does macroeconomics focus on?

Answer 5

Issues that affect the economy as a whole and the interaction between economic growth in output and national income, employment and the general level of prices.

Question 6

What are 4 key economic indicators macroeconomics focuses on?

Answer 6

1. Unemployment rates
2. Gross domestic product (GDP)
3. Inflation
4. Exports and imports

Question 7

How do microeconomics and macroeconomics relate to each other?

Answer 7

In simple terms, microeconomics examines and quantifies changes in the behaviour of
producers and consumers in individual markets, which consequently will have an effect on the macroeconomy and the rate of economic growth, inflation, employment and trade.

Question 8

We are looking at key economic indicators which measure Australia’s economic activity. What is GDP?

Answer 8

The monetary value of all the finished goods and services produced in Australia in a specific time period.

Question 9

We are looking at key economic indicators which measure Australia’s economic activity. What is balance of payments?

Answer 9

The record of all economic transactions between Australia and the rest of the world in a specified period, i.e., export and import levels.

Question 10

We are looking at key economic indicators which measure Australia’s economic activity. What is net foreign debt?

Answer 10

All financial obligations owed by Australians to other countries, after considering financial obligations owed to Australians by other countries.

Question 11

We are looking at key measured used within financial markets - specifically: consumption, investment and production measures. What are retail sales?

Answer 11

An aggregated measure of the sales of retail goods over a specific time period.

Question 12

We are looking at key measured used within financial markets - specifically: consumption, investment and production measures. What are building approvals?

Answer 12

Construction of new buildings and alterations/additions to existing buildings

Question 13

We are looking at key measured used within financial markets - specifically: consumption, investment and production measures. What is housing finance?

Answer 13

Includes finance provided for construction or purchase of owner-
occupied or investment dwellings.

Question 14

We are looking at key measured used within financial markets - specifically: price and income measures. What is the Consumer Produce Index?

Answer 14

Measures quarterly changes in the price of a representative basket of goods and services.

Question 15

We are looking at key measured used within financial markets - specifically: price and income measures. What is the Wage Price Index?

Answer 15

Measures changes in the price of wages and salaries in the Australian labour market.

Question 16

We are looking at key measured used within financial markets - specifically: price and income measures. How average weekly earnings considered?

Answer 16

Measuring the level of average earnings in Australia at a point in time reflecting the proportion of full-time, part-time, casual employees.

Question 17

We are looking at key measured used within financial markets - specifically: labour force measures. How is the unemployment rate considered?

Answer 17

Measuring the percentage of the total workforce who are unemployed (and looking for a paid job)

Question 18

What was Australia’s GDP in 2019

Answer 18

$1.99 trillion

Question 19

Who was Australia’s top 6 export destinations in FY 2019-2020?

Answer 19

1. China (31%)
2. Japan (13%)
3. EU (7%)
4. Korea (6%)
5. US (5%)
6. India (5%)

Question 20

What are 3 roles of the government in promoting economic growth and stability by promoting a productive society?

Answer 20

1. Legal and policy frameworks
2. Stable environment for business activities
3. Support businesses and individuals

Question 21

How does the government support economic growth through legal and policy frameworks?

Answer 21

Regulation is designed to promote fairness and
transparency.

Question 22

How does the government support economic growth through a stable environment for business activities?

Answer 22

Maintaining growth, price stability and
promoting employment (through adjusting fiscal policy as well as by controlling credit
and the supply of money through government monetary policy).

Question 23

How does the government support economic growth through support to businesses and individuals?

Answer 23

Investing in infrastructure such as roads, communication networks, education, training and health care.

Question 24

What two different policies used to control the economic environment?

Answer 24

1. Fiscal policy
2. Monetary policy

Question 25

What is fiscal policy?

Answer 25

Government spending and taxation that influences the economy.

Question 26

Regarding fiscal policy, what does the government’s annual budget outline?

Answer 26

The government’s revenue and spending activities which cover:
1. Revenue and capital sources (collecting taxes and borrowing funds)
2. Spending activities (e.g., health, education, welfare spending and defence spending.)

Question 27

What is the relationship between fiscal policy and household spending?

Answer 27

Fiscal policies influence the purchasing power and spending patterns of households and business which in turn have an impact on the economy.

For example, if the government increases taxes, households and businesses have fewer surplus funds for spending, leading to less demand for goods and services, and ultimately lower economic growth.

Question 28

Who is responsible for Australia’s monetary policy?

Answer 28

The RBA (Reserve Bank of Australia)

Question 29

What are the aims of setting monetary policy?

Answer 29

Maintain price stability, full employment and the economic prosperity of the Australian people by managing inflation.

Question 30

How does the monetary rate function?

Answer 30

Monetary policy involves setting the interest rate on overnight loans in the money market (‘the cash rate’). The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.

Question 31

How does the RBA meet monetary policy objectives?

Answer 31

The RBA has an ‘inflation target’, aiming to keep consumer price inflation in the economy to 2-3 per cent, on average, over the medium term.

Question 32

What are the benefits of controlling inflation?

Answer 32

Preserves the value of money and encourages strong and sustainable growth in the economy over the longer term.

Question 33

Does the RBA set rates in conjunction with the government?

Answer 33

No, it sets rate independently of the political process.

Question 34

What is a budget deficit?

Answer 34

When the government spends more than it collects

Question 35

What is a budget surplus?

Answer 35

When the government collects more than it spends

Question 36

What happens if the government increases taxes?

Answer 36

Households and businesses have less surplus funds for spending, leading to less demand for goods and services, and ultimately lower economic growth