Economics U4 AOS1
Clone
Register
Economics U4 AOS1
Untitled Flashcards
Study
Budgetary (fiscal) policy vs monetary policy
Federal government uses budgetary policy while RBA uses monetary policy to influence spending and economic activity
Sources of Government Revenue
Direct taxes Indirect taxes Non-tax revenues
Types of taxes
Progressive Regressive Proportional
Government spending
Government current consumption Government investment expenditure
Describing Budget outcomes
Budget surplus Revenue> Outlays Budget deficit Outlays > revenue Budget balance Revenue = Outlays
Methods of reporting budget outcomes
Headline Balance Underlying Cash balance
Financing a Deficit
Federal government sells bonds to: RBA Australian investors Overseas investors
Utilising a Surplus
Save with RBA Reduce Debt Add to investment balances in special savings funds
Problems with deficits
Loss of credit ratings Interest payments take money from providing community services Less able to deal with economic stress Increasing unsustainability and burden on future generations
Advantages of surpluses
Protect Australias credit rating Generates confidence Create fighting fund for bad times allowing government to deal with severe economic crisis or slowdown Can offset deficits and avoid debt which is more sustainable and does not burden future generations
Types of Stablisers
Automatic stablisers (cyclical stablisers) Discretionary stabilisers (structural stablisers)
Stance of budgetary policy
Contractionary stance Neutral stance Expansionary stance
Using budget to acheive low and stable inflation
Increase size of surplus or decrease size of the deficit to increase the contractionary impact Government can implement policies that are designed to restrain AD growth If inflation is supply driven, the government could introduce supply side intiatives such as increasing tax concessions for businesses
Using budget to acheive SSEG
Increase transfer payments (pensions or other welfare payments) Bonus stimulus payments Personal tax cuts to increase disposable income Business tax cuts to stimulate investment spending Increased G1 and G2 spending
Using the budget to acheive full employment
A 'work for the dole' scheme Increasing funding for job placement Funding of the unemployed to start a business Increased spending to training and education Subsidies to businesses to employ certain job seekers
Government can reallocate resources through the budget to solve market failures (living standards)
Funding of the provision of public services like defence The provision of goods with positive externalities in production and consumption Taxes on goods with negative externalities in production and consumption
Strengths of budgetary policy
Automatic stablisers have short lag times for their recognition, implementation and impact Automatic stablisers usually do not create a permanent deficit or need for borrowing Budgetary policy is a flexible instrument, and discretionary policies can be used to target the governments economic or social objectives Works directly to change AD and economic activity Can make both AD and AS side conditons more favourable
Weaknesses of budgetary policy
Discretionary policies can take a long time to implement Lack of flexibility in some parts - difficult to decrease welfare benefits, education and health funding Political constraints can limit budget options Constraints due to conflicts between government economic goals The budget is traditionally implemented annually and thus may not be effective responding to immediate concerns
Objectives of RBA
Stability of the currency (price stability) Maintenance of full employment Increasing economic prosperity and welfare for all Australians (living standards)
Role of the RBA
Controls supply of cash Controls level of borrowing and lending Ensure actual cash rate is closest to target cash rate
Monetary policy stances
Contractionary/restrictive Neutral Expansionary/accomodative
Unconventional monetary policy
Forward guidance
Transmission mechanisms
Savings and investment channel Cash-flow channel Asset prices and wealth channel Exchange rate channel
Strengths of monetary policy
Free from political bias Short implementation lag Powerful influence on the behaviour of consumers, investors, borrowers and lenders Powerful in restraining AD
Weaknesses of monetary policy
Relevant to current economic climate: Unable to target specific aspects of the economy Impact lag is long (can take up to 2 years) Cant directly reduce inflationary pressures generated by supply May be undermined by budgetary policy Not relevant to current economic climate: RBA doesn't have control over interest rates Less effective in stimulating AD in a downturn Less effective when debt is high
Untitled Flashcards
Study
AD policies
Include measures by the RBA to operate monetary policy and deliberate policies as set out by the government through the use of budgetary policies
Direct taxes
A payment to the government levied upon generally earned income/profit e.g personal income tax, company tax
Indirect tax
Taxes imposed on the production or consumption of goods and services and is not dependent on income/profit e.g. GST, cigarette tax
Non-taxation revenue
Receipts from asset sales (e.g government selling medibank) Profits from the operation of government business (e.g Australia post) Interest earned from loans
Progressive
Higher income earners pay a higher marginal tax rate e.g. Personal tax
Regressive
The proportion (%) of income paid in tax rises as income falls e.g. GST
Proportional
The 'rate of tax' stays the same regardless of how much income is earned e.g. Company tax
Government current consumption
Represents payments for goods and services which have immediate economic benefit and no ongoing benefit into the future
Government investment expenditure
Represents purchases of capital assets that will have ongoing benefit into the future
Transfer payments
Transfer of money from the budget to the private sector e.g. welfare payments such as pensions
Headline balance
The difference between the cash outlays and cash revenues from all sources
Underlying cash balance (Budget outcome
Uses figures for the headline balance but subtracts volatile items (aka "Net cash flows from investment in financial assets for policy purposes")
Government debt
What the Australian government has borrowed from other entities
Net government debt
How much the Australian government has borrowed from other entities difference between what Australian government has lent to other entities
Fiscal consolidation
the government aims to acheive a budget surplus on average over the business cycle as their medium term goal
Public debt
Government debt
Private debt
Individual and company debt
NFD
Public + Private debt
Energy bill relief
a discretionary budgetary intiative aimed to reduce the cost of living pressures to eligible households by providing a $300 rebate to households on their energy bills
Tax 3 stage cuts
A discretionary budgetary initiative aimed to reduce the cost of living pressures for eligible individuals who are in lower income brackets by increasing the range of the lower tax brackets and reducing the percentage of their income they need to pay for tax.
Limiting capacity on international students
A discretionary budgetary intiative aimed to limit the number of international students allowed in the country. This limits and thus decreases our export of education.
The stablity of the currency/the goal of low inflation
Targeting a sustained increase in inflation rate of 2-3% (measured by CPI)
Maintenance of full employment/goal of full employment
Achieving an unemployment rate between 4-4.5% (with no cyclical unemployment) and avoids rising inflation and wage growth
Increasing economic prosperity and welfare for all Australians
increasing average living standards
Goal of strong sustainable economic growth (SSEG)
Acheiving a sustained increase in real GDP by 3-3.5% annually, consistent with full employment and without causing excessive inflationary, environemtnal and external pressures.
Policy interest rate corridor
Dependent on if there is a surplus or deficit in banks exchange settlement accounts (ESAs) at the end of the day RBA borrowing rate is 0.25% (25 basis points) above the target cash rate and the RBA deposit rate is 0.10% (10 basis points) below the target cash rate.
Open market operations
RBA can manipulate supply of cash in the cash market by buying and selling financial instruments to financial institutions such as Commonwealth government securities (CGS) Repurchase agreements (repos)
Savings and investment channel
Impacts the cost of credit (borrowing) which affects demand for borrowing which affects AD
Cash flow channel
Impacts the discretionary income of households with existing loans which affects AD
Asset prices and wealth channel
Impacts the demand and value of assets, resulting in the wealth effect which affects indivudal confidence which affects AD