fiscal policy
What are the three main sources of government income?
Direct taxation (e.g. income tax), indirect taxation (e.g. GST, excise), and non-tax revenue (e.g. government enterprise profits, asset sales).
Who is responsible for setting monetary policy in Australia?
The Reserve Bank of Australia (RBA).
What is the main aim of aggregate supply policies?
To increase efficiency, productivity, and competitiveness by shifting LRAS outward.
Name two of the government’s key macroeconomic objectives.
Examples include sustainable growth, full employment, price stability, external stability, equitable income distribution, and improved living standards.
What is the primary aim of microeconomic reform?
(A) Improve living standards
(B) Reduce income inequality
(C) Increase economic efficiency
(D) Decrease demand-pull inflation
C
What is the difference between automatic stabilisers and discretionary spending?
Automatic stabilisers adjust automatically with the cycle (e.g. unemployment benefits), while discretionary spending requires deliberate government decisions (e.g. new infrastructure projects).
What is the RBA’s inflation target range?
2–3% on average over the medium term.
Name two historical microeconomic reforms that shaped Australia’s economy.
Prices and Incomes Accord (1980s), financial deregulation (1983), floating of the exchange rate (1983).
Which policy tool is most effective in targeting inflation?
Monetary policy (interest rate changes by the RBA).
Microeconomic reform in the AD–AS model is represented by:
(A) AS shifts right, increasing real GDP
(B) AD shifts right, increasing real GDP
(C) Movement along AS, increasing real GDP
(D) Movement along both AS and AD, increasing real GDP
A
Give an example of an expansionary fiscal policy stance from a recent Australian federal budget.
The 2020–21 Federal Budget included JobKeeper, JobSeeker supplements, and personal income tax cuts to stimulate demand.
By how many basis points does the cash rate change if it moves from 4.10% to 3.85%?
25 basis points.
How can investment in education and training improve long-run aggregate supply?
It raises workforce skills and productivity, shifting LRAS to the right.
how does sustainable economic growth differ from external stability?
Sustainable growth = steady non-inflationary GDP growth; external stability = balanced trade/foreign debt and stable exchange rate.
If a budget had a sudden downturn in consumer demand, the expected change is:
(A) No change, budget target still achievable
(B) ↑ Unemployment benefits & smaller budget deficit
(C) ↓ Unemployment benefits & smaller budget deficit
(D) ↑ Unemployment benefits & larger budget deficit
D
How does fiscal policy aim to achieve internal stability?
By using expansionary policy in downturns to reduce unemployment and contractionary policy in booms to control inflation.
Explain one step of the transmission mechanism of monetary policy.
A lower cash rate → lower borrowing costs → higher consumption & investment → increased aggregate demand.
Apply the production possibility curve (PPC) to show the effect of microeconomic reform.
Successful reforms shift the PPC outward, allowing greater output with the same resources.
explain how fiscal and monetary policy work together to improve living standards.
Fiscal policy boosts incomes/employment; monetary policy lowers borrowing costs. Together, they increase consumption, reduce unemployment, and stabilise inflation.
Monetary policy is less effective when the economy is in a trough because:
(A) Excess production capacity limits employment growth
(B) Average propensity to save is high due to low consumer confidence
(C) Politics discourage interest rate reductions
(D) Businesses expect rates to rise and reduce investment
B
Evaluate the effectiveness of contractionary fiscal policy in controlling inflation while maintaining living standards.
It reduces inflation by lowering AD but risks slowing growth and increasing unemployment. Effectiveness depends on timing, confidence, and global conditions.
Evaluate the effectiveness of monetary policy in achieving both sustainable growth and external stability.
It effectively manages inflation and growth, but lags, reliance on private confidence, and global shocks limit external stability impacts.
Analyse the effectiveness of labour market reform in improving efficiency and competitiveness.
Reforms like enterprise bargaining boost productivity and flexibility but may reduce equity/security. Effective but politically contested.
Critically assess whether all economic objectives can be achieved simultaneously.
Objectives often conflict (e.g. full employment may cause inflation). Trade-offs are necessary; some objectives can align, but not all simultaneously.
Given low inflation, increasing GDP, falling unemployment, and stable dwelling approvals, the best policy mix is:
(A) Expansionary monetary & fiscal
(B) Neutral monetary & fiscal
(C) Expansionary monetary & neutral fiscal
(D) Neutral monetary & contractionary fiscal
C