Fiscal Policy
What are the main sources of government income?
- Direct and indirect taxation
- Revenue from government enterprises
- Sale of government assets
What is the primary role of the Reserve Bank of Australia (RBA)?
To conduct monetary policy, manage inflation, and ensure the stability of the financial system.
What are aggregate supply policies?
Policies aimed at improving the efficiency and competitiveness of the economy, often through microeconomic reforms.
What is meant by the stabilisation of the economic cycle?
Government policies aim to smooth out the fluctuations in economic activity, reducing the severity of booms and busts.
What is the primary goal of fiscal policy in economic management?
To manage aggregate demand to achieve economic objectives such as growth, employment, and price stability.
What are the components of government expenditure in the federal budget?
Current expenditure, capital expenditure, and transfer payments.
What is the significance of inflation targeting in the context of monetary policy?
Inflation targeting involves setting an explicit inflation rate target (commonly around 2-3% in Australia) and adjusting monetary policy tools, such as the cash rate, to steer actual inflation towards that target, thereby promoting price stability and economic predictability.
How does the production possibility curve relate to microeconomic policies?
Microeconomic policies can shift the production possibility curve outward, indicating an increase in the economy's productive capacity.
What is a limitation of demand management policies?
Time lags, where the effects of policies may take time to be felt in the economy.
How does monetary policy contribute to living standards?
By controlling inflation and stabilising the economy, monetary policy helps maintain purchasing power and economic confidence, contributing to higher living standards.
What is the role of automatic stabilisers in fiscal policy?
They are government programs that automatically adjust to changes in the economic cycle to stabilize aggregate demand without additional government intervention.
How does a change in the cash rate affect economic activity?
A decrease in the cash rate lowers interest rates, stimulating borrowing and spending, while an increase in the cash rate raises interest rates, reducing borrowing and spending.
Name a historical aggregate supply policy in Australia (hint: external)
The floating of the exchange rate.
How do global influences constrain macroeconomic policy?
International economic conditions, such as exchange rates and global demand, can impact the effectiveness of domestic policies.
What are automatic stabilsers and why are they important?
Automatic stabilisers are mechanisms that naturally counteract economic fluctuations without additional government intervention, helping to stabilize the economy.
How does discretionary spending influence aggregate demand?
Discretionary spending allows the government to deliberately adjust spending levels to influence aggregate demand and stabilize the economic cycle.
Describe the transmission mechanism of monetary policy.
It refers to the process through which changes in the cash rate influence aggregate demand and, consequently, economic activity and inflation.
What is the significance of financial industry deregulation to Australia’s economic growth?
It increased efficiency and competitiveness, contributing to higher economic growth and better integration into the global economy.
How can political constraints affect economic policy-making?
Political pressures and the electoral cycle can lead to short-term decision-making that may not align with long-term economic objectives.
Evaluate the role of microeconomic policies in improving economic efficiency.
Microeconomic policies, such as deregulation and competition policy, reduce inefficiencies in markets, leading to more optimal resource allocation and higher productivity.
Explain how an expansionary fiscal policy stance can impact the economy.
An expansionary fiscal policy, through increased government spending or tax cuts, increases aggregate demand, leading to higher economic growth and potentially reducing unemployment.
Evaluate the effectiveness of monetary policy in achieving the government's economic objectives.
It is a blunt instrument, and its effectiveness depends on factors such as time lags, global economic conditions, and the initial level of interest rates. While it is powerful in controlling inflation (during a peak), it may be less effective in stimulating demand during a recession.
Analyse a microeconomic policy aimed at improving Australia’s economic growth.
For example - investment in infrastructure improves productivity by reducing transportation costs, enhancing the efficiency of supply chains, and supporting economic growth.
Explain how macroeconomic policies contribute to internal and external stability.
Macroeconomic policies like fiscal and monetary policies help achieve internal stability by promoting price stability, full employment, and sustainable economic growth. For external stability, these policies aim to maintain a sustainable balance of payments and stable exchange rates, reducing vulnerability to external shocks.
How do fiscal and monetary policies interact to achieve economic objectives?
Fiscal policy affects government spending and taxation, while monetary policy controls money supply and interest rates; together, they can be coordinated to manage aggregate demand and stabilise the economy.