All Decks

#separator:tab #html:true "<div>Define relative scarcity and explain what the consequence of it is.</div>""<div>· The basic economic problem of relative scarcity arises due to the phenomenon of humans having infinite wants, but a limited amount of resources to satisfy those wants </div> <div>· This conflict between infinite wants and finite resources requires decision-making and choices by all economic entities on the allocation of resources.</div>" "<div>Define Opportunity Cost, and explain how different sectors in the economy experience opportunity cost in their decision-making.</div>""<div>The basic concept of opportunity cost relates to the forgoing of the next best alternative choice as a result of making the current decision. </div> <div>Opportunity cost is applied on every level of economics, and for every level of economic entity; from a consumer choosing to buy at one supermarket over another, to a Prime Minister allocating more government funds to a nation’s military over its education sector.</div>" "<div>What is a PPF?</div>""<div>The Production Possibility Frontier is a curve that illustrates the variations in the amounts of two products that can be produced with the current available resources in the economy given they both depend on the same finite resource for their manufacture.</div>" "<div>How does the production possibility curve illustrate the concepts of scarcity, choice, opportunity cost and underutilisation of resources and efficiency?</div>""<div>a) PPC illustrates scarcity as it displays a limit to how much of two goods can be produced given the current resources in an economy. If an economy allocates all its resources to produce Product A, it cannot produce any units of Product B and vice versa; the economy cannot allocate all its resources to both Product A and B, as resources are not infinite. b) PPC illustrates choice and opportunity cost as it displays an inverse relationship between two products, and increasing the production of one product results in trading off the production of another. Opportunity cost is the numerical trade-off of one product as a result of allocating resources to another. c) By definition, the points on the Production Possibilities Curve involve the use of all currently available resources. As a result, any combination of products produced within the PPC is considered inefficient, and an underutilisation of resources.</div>" "<div>Draw an example of a production possibility curve.</div>""<img src=""paste-144d8a3a21aba7f10165bc394503d92ccae5ece0.jpg"">" "<div>What are the three basic economic questions?</div>""<div>What to produce?</div> <div>How to produce?</div> <div>For whom to produce?</div>" "<div>How does a Market Capitalist System answer the three basic economic questions?</div>""<div>1) What and how much to produce:</div> <div>            -consumer sovereignty: resources are ultimately allocated by consumers, because businesses will only produce what consumers will buy (to maximise profits).</div> <div>2) How to produce:</div> <div>            -profit-seeking businesses use the lowest-cost, most efficient method of production to offer lower prices to consumers and improve market share.</div> <div>3) How will income be distributed:</div> <div>            -income is earned by possessing resources</div> <div>            -the more productive the resources you possess, the more income you can earn</div> <div>            -as a result, there is significant inequality in income distribution</div>" "<div>How does Australia’s “mixed market economy” answer the three basic economic questions?</div>""<div>How does the government intervene?</div> <div>1) What and how much to produce:</div> <div>            -  of resources are allocated by the market</div> <div>            -  are allocated by government</div> <div>            e.g. illegal goods, cigarette excise, public education</div> <div>2) How to produce:</div> <div>            Some restrictions</div> <div>            e.g. environmental regulations, labour market laws</div> <div>3) How to distribute income:</div> <div>            The government redistributes income to an extent</div> <div>            e.g. means-tested welfare, progressive personal income tax</div>" "<div>Recall and define the four types of economic efficiency.</div>""<div>Allocative efficiency = Allocating resources to the production of goods and services in a way which maximises the satisfaction of society’s wants and needs. i.e. producing the ‘right’ goods and services and producing them in the ‘right’ quantities.</div> <div>Technical efficiency = Maximising output per unit of input i.e. minimising production costs (producing  g&s in the ‘right’ way).</div> <div>Dynamic efficiency = How quickly an economy can reallocate resources to achieve allocative efficiency in response to changing consumer preferences.</div> <div>Inter-temporal efficiency = Balancing the allocation of resources between the present and the future i.e. satisfying today’s wants and needs without jeopardising the ability to satisfy wants and needs in the future.  e.g.1. Destroying natural resources with current production methods ☹ e.g.2. Investing now to produce more in the future ☺</div>" "<div>What is meant by “an efficient allocation of resources”?</div>""<div>1) An efficient allocation of resources is when scarce resources are allocated in a way which maximises the satisfaction of society’s wants and need (social welfare)</div> <div> </div> <div>2) Opportunity cost will be minimised and no alternative allocation of resources can improve social welfare. It will be impossible to make someone better off without making someone else worse off.</div> <div> </div> <div>3) The four types of efficiency should be at a maximum.</div>" "<div>How do we relate the four types of efficiency to the PPF?</div>""<img src=""paste-4a0d7c11a68abea49f8c47400ffc802038e975d7.jpg""><br><img src=""paste-5238f10ce203b4a6b1e305d27e41b998f0b3a1c2.jpg""><br><img src=""paste-ceb2bb8a7094586a2f1f57c515be6c4fc438f28e.jpg""><br><img src=""paste-64a10667062da3ee59c427ec0494c6260f01bf75.jpg"">" "<div>What are the key preconditions and assumptions for a perfectly competitive market?</div>""<div>1) Large number of sellers. Therefore, no individual seller has the market power to influence price. Thus, firms are ‘price takers’. (There are also many buyers.) There is therefore a strong levels of competition. </div> <div>2) Homogenous products i.e. there is no product differentiation e.g. branding. This encourages suppliers to offer the lowest price possible in order to attract customers. </div> <div>3) Ease of entry and exit. It is easy for firms to enter and exit the market e.g. low barriers to entry, such as set up costs. Therefore, if the demand for a good/service increases, new firms can easily enter the market to take advantage of the opportunity to make profits </div> <div> </div> <div>1) Full information. Buyers and sellers have full information e.g. consumers know exactly what they are buying and can easily compare prices. Consumers can therefore make rational choices </div> <div>2) Mobility of resources. Resources are mobile, such that businesses can easily reallocate them to produce different goods/services as consumer preferences change </div> <div>3) Sellers and buyers seek to maximise their wellbeing i.e. sellers seek to maximise profit and buyers seek to maximise utility (satisfaction)</div>" "<div>What is the law of demand?</div>""<div>The Law of Demand states that the demand for a particular good or service (consumer’s willingness and ability to purchase a good/service) has a negative relationship with the price of the good/service (or general prices). In other words, when prices increase, then demand decreases.</div>" "<div>What is the ‘theory’ of the law of demand (i.e., what are the behavioural assumptions that guide the law of demand)?</div>""<div><b><u>Income Effect</u></b><b> –</b> some people may no longer be able to purchase a product as its price increases. At a lower price, more people are able to afford a good/service without forgoing a larger percentage of their income </div> <div><b><u>Substitution Effect</u></b><b> –</b> People may substitute to other viable (cheaper) goods and services given the option, so demand for the relatively expensive product decreases.</div> <div><b><u>Perceived Value</u></b><b> –</b> A higher price may mean that producers are charging a monetary amount greater than what consumers think the product is worth. As the price goes up, it may exceed the good/service’s perceived value</div> <div><b><u>Diminishing Marginal Utility</u></b><b> -</b> Each additional unit of consumption yields less benefit/satisfaction for the consumer. Therefore, a lower price is required to induce greater volumes of consumption At lower prices, consumers tend to purchase greater quantities as the value (utility) of subsequent additional units still exceeds the price</div>" "<div>Distinguish between an expansion in quantity demanded and an increase in demand.</div>""<div>An increase in demand is caused by a favourable non-price demand factor that increases consumers' willingness and ability to consume at each and every price (such as an increase in the price of substitutes, or an increase in the popularity of a product) and is illustrated by a shift of the entire demand curve to the right. In contrast, an expansion in demand is an increase in the quantity demanded along a single demand curve caused by a decrease in the price of a good/service, usually occurring when firms slash-down prices in attempt to eliminate a surplus in the market. An expansion in demand is illustrated by a movement down (to the right) on the demand curve.</div>" "<div>Distinguish between a shift of the demand curve to the left and a movement along the demand curve to the left. </div>""A movement along the demand curve to the left illustrates a contraction in demand and is caused by an increase in the price of a good/service, usually occurring when consumers bid-up prices in response to shortages in a market. In contrast, a shift of the demand curve to the left is caused by an unfavourable demand factor that decreases consumers’ willingness and/or ability to purchase at each and every price (such as a decrease in consumer confidence, or shifts of consumer tastes and preferences). It thus represents a decrease in demand." "<div>What are the non-price (microeconomic) demand factors?</div>""<div>Disposable income- Income available for spending after receipt of welfare benefits and deduction of direct (income) taxes </div> <div>- Price of substitutes - Viable good or service that may be used instead of the product in question. Coke and Pepsi if one goes up in price the demand for the other increases </div> <div>-Price of complements- Complementary products are generally consumed together. They are products sold separately but often used together coffee and tea, if the price goes up for milk then the demand for coffee will decrease. </div> <div>Changes to society’s tastes - if people stop liking fidget spinners then the demand for them will go down </div> <div>Population change - Growing population generally need more goods and services. as the population of an economy increases the demand also increases</div> <div> Demographic change - a study of the population. Includes looking at population distribution, the birth and death rates, and the immigration and emigration rates </div> <div>Consumer confidence - how positively consumers view their future economic prosperity influences their willingness to purchase goods and services. If cc is high demand will increase.</div> <div>Interest Rates</div> <div>The cost of borrowing is usually measured by the level of interest rates attached to various forms of credit, such as credit card rates and home loan rates.</div> <div>Higher interest rates lead to a fall in discretionary income, and as a consequence, households will demand fewer goods and services.</div> <div>Rising interest rates also have particular effects for larger, more expensive items usually purchased via credit card.</div>" "<div>What is the law of supply?</div>""<div>The law of supply states that price and quantity supplied have a positive/direct relationship.</div> <div>It says that as price increases, the quantity supplied expands and vice versa.</div>" "<div>What is the ‘theory’ of the law of supply (i.e., what are the behavioural assumptions that guide the law of supply)?</div>""<div>Assuming all else is constant, an increase in price will lead to <b>higher profits</b> for producers, making them more willing and able to produce.</div> <div> It also means that the <u>opportunity cost of using resources to produce alternative products</u> is now higher. {Profit Motive}</div>" "<div>What is the difference between a contraction in supply and a decrease in supply?</div>""<div>A decrease in supply is caused by an unfavourable non-price supply factor that decreases business' willingness and/or ability to produce at each and every price (such as poor climatic conditions, decreased productivity) and is illustrated by a shift of the entire supply curve to the left. In contrast, an contraction in supply is a decrease in the quantity supplied along a single supply curve caused by an decrease in the price of a good/service, usually occurring in response to surpluses in a market. An contraction in supply is illustrated by a movement down (to the left) on the supply curve.</div>" "<div>What is the difference between a shift of the supply curve to the right and a movement along the supply curve to the right?</div>""<div>A movement along the supply curve to the right illustrates an expansion in supply and is caused by an increase in the price of a good/service, usually occurring when consumers bid-up prices in response to shortages in a market. In contrast, a shift of the supply curve to the right is caused by an favourable supply factor that increases suppliers willingness and/or ability to produce at each and every price (such as a decrease in production costs, climatic conditions or easing of government taxes). It thus represents an increase in supply.</div>" "<div>What are the non-price (microeconomic) supply factors?</div>""<div><b>Costs of Production: </b>Rising costs of production make firms less <b><u>able</u></b> to produce (due to an inability to employ as many resources with the same budget) and less <b><u>willing</u></b> to produce (due to the adverse effect on profits). Therefore, when costs rise supply will <b><u>decrease</u></b> (the supply curve will shift to the <b><u>left</u></b>).</div> <div> </div> <div><b>Productivity</b> = <b><u>a measure of output per unit of input of resources</u></b>. If productivity rises then per unit costs will fall, resulting in an increase in firms’ profits. Therefore, firms become more <b><u>willing and able</u></b> to produce. This causes the supply curve to shift to the <b><u>right</u></b>. In other words, supply <b><u>increases</u></b>.</div> <div> </div> <div><b>Climatic Conditions :  </b>Impact the <b><u>ability</u></b> of firms to produce G/S.<b> </b>Adverse climatic conditions will result in a <b><u>decrease</u></b> in supply / shift in the supply curve to the <b><u>left</u></b>.<b> </b>E.g. <b><u>the Queensland floods reduced the ability of firms to produce fruit and vegetables, tourism and minerals.</u> </b>More favourable climatic conditions will result in an <b><u>increase</u></b> in supply / shift in the supply curve to the <b><u>right</u></b>.<b></b></div> <div><b> </b></div> <u>Technology, Number of Suppliers</u><br>" "<div>Define market equilibrium and list some of its characteristics.</div>""<div>Market equilibrium occurs when the quantity demanded and supplied at a certain price is equal. At market equilibrium, the market is cleared (i.e. there are no shortages/surpluses) and consumers' willingness to purchase is the same as suppliers' willingness to supply at that price.</div>" "<div>When quantity demanded exceeds quantity supplied, how does the market operate to reach a new equilibrium?</div>""<div>When qty demanded exceeds supplied, there is a shortage in the market. In response to the shortage, consumers bid-up prices so that demand contracts and supply expands until a new equilibrium is reached at a higher price.</div>" "<div>When quantity supplied exceeds quantity demanded, how does the market operate to reach a new equilibrium?</div>""<div>When qty supplied exceeds qty demanded, there is a surplus in the market. In response to the surplus, firms slash down prices so that demand expands and supply contracts until a new equilibrium is reached at a lower price.</div>" "<div>With reference to the advent of new technology employed in the production process of clothing, explain how the market of clothing would be affected using a -step explanation.</div>""<div>New technology employed in the production process of clothing is likely to improve production methods and increase the number of units of clothing produced per unit of input, i.e. there will a higher level of productivity. This means that firms are more able (as they are able to produce more units on a similar buidget) and more willing (as their profitability has improved) to produce, thus there is an increase in supply. This increase in supply would mean that supply exceeds demand at the original price, i.e. there is a surplus in the market. In response, firms will slash down prices so that demand expands and supply contracts until a new equilibrium is reached at a higher quantity produced and lower price.</div>" "<div>Fill in the following table below. </div><img src=""paste-7f8c5b47fab8afbc6a080875308d0f371c903aba.jpg""><br>""<img src=""paste-97d60613e0a269007f7a8e1876b2850e7b457030.jpg"">" "<div>Define price elasticity of demand and describe how economists can both numerically and qualitatively describe goods/services that have price elastic, price inelastic and unit elastic demand.</div>""<div>Price elasticity of demand refers to the responsiveness of the demand for certain goods/services in relation to changes in the price for the good/service. In quantitative terms, the price elasticity of demand for a product is calculated as the percentage change in quantity demanded, divided by the percentage change in price.</div>" "<div>Why is price elasticity of demand significant for businesses?</div>""<div>1) Pricing Policy: - If low PED, raise prices to raise revenue -If high PED, lower price to raise revenue </div> <div>2) Generally, firms prefer to product products with a low PED (especially if they can control): - can raise price and demand will contract by a smaller ) </div> <div>3) Firms may try to lower PED through advertising (to lift brand loyalty) and reduce perceived substitutability.</div>" "<div>Define indirect taxes and describe the impact price elasticity of demand has on the effectiveness of indirect taxes in a market with low price elasticity of demand.</div>""<div>Indirect taxes are taxes levied by the government on the producers of goods/services, who pass on higher costs of production to consumers as higher prices. Indirect taxes designed to reduce consumption may be ineffective if the product has low PED (e.g. cigarettes). Indirect taxes designed to raise revenue may be most effective if product has low PED (e.g. Petrol, Alcohol).</div>" "<div>Who faces the relative burden of taxes in a market with relatively inelastic demand and why? What about markets with relatively elastic demand?</div>""<div>If PED is low, larger tax burden on consumers than producers as business can pass on higher prices without much of a loss in sales. If PED is high, firms may have to face the burden of the tax as they cannot raise prices too high as sales with decrease drastically.</div>" "<div>Describe the impact on household budgets if a g/s with relatively inelastic demand faces a rise in its price.</div>""<div>Since demand for petrol is inelastic (due to it being viewed as a necessity for households to fuel their cars for transport), a rise in petrol prices will result in a proportionately smaller contraction in the quantity of petrol demanded. That is to say that households are unlikely to drive their cars drastically less because of the rise in petrol prices. Instead, households are likely to continue purchasing a similar amount of petrol, but be paying more per litre for it. Thus, their weekly spending on petrol will rise.</div>" "<div>Describe the impact on company profits if a g/s with relatively inelastic demand faces a rise in its price.</div>""<div>Given inelastic demand for petrol, a rise in the price of petrol will lead to a less than proportionate contraction in demand. Since revenue = quantity sold x price, if price rises by a greater proportion that what quantity sold falls by, overall revenue is rising. Since profit = revenue – costs, a rise in revenue will lead to a rise in the profits of petrol companies (assuming costs are unchanged).</div>" "<div>Define price elasticity of supply and describe how economists can both numerically and qualitatively describe goods/services that are price elastic, price inelastic and unit elastic markets.</div>""<div>Price elasticity of supply refers to the responsiveness of the supply of certain goods/services in relation to changes in the price for the good/service. In quantitative terms, the price elasticity of supply for a product is calculated as the percentage change in quantity supplied, divided by the percentage change in price.</div>" "<div>Would firms prefer to operate in a market with high or low price elasticity of demand?</div>""<div>2) Generally, firms prefer product products with a low PED (especially if they can control): - can raise price and demand will contract by a smaller ) Except when there is excess supply!!</div>" "<div>Would firms prefer to operate in a market with high or low price elasticity of supply?</div>""<div>High PES. As qty supplied will be more responsive to external fluctuations to changes in demand</div> <div> </div> <div>This means that profits can be maximised and losses minimised when markets adjust to higher/lower prices respectively.</div>" "<div>What are the four factors that affect price elasticity of demand? Briefly explain each factor's effect on PED.</div>""<div><u>Degree of necessity</u> : If a product is a necessity, then consumers are likely to continue purchasing it at similar amounts even if price rises, because they need the product! (inelastic demand). If a product is a luxury, consumers are more likely to be responsive to price changes since they can live without it. (elastic demand)</div> <div> </div> <div><u>Proportion of Income</u>: If a product is cheap and therefore represents a small percentage of consumers’ income, they are unlikely to notice/care about price changes and therefore unlikely to drastically alter their demand (inelastic demand).  More expensive items will have a much greater impact on consumers’ budgets, so consumers will definitely reconsider their purchases if prices change (elastic demand)</div> <div> </div> <div><u>Substitutability</u>: If there are not many substitutes available, then consumers may be forced to tolerate price changes without being able to alter their purchases (inelastic demand). Unique products and monopoly markets are common examples. Brand loyalty and effective advertising can play a part in reducing perceived substitutability.</div> <div> </div> <div>If an item is highly substitutable, then it can easily be replaced if prices change (elastic demand).</div> <div> </div> <div><u>Time</u>: Demand is likely to be more elastic in the long-term than the short-term because more time gives consumers the opportunity to change behaviour / find substitutes.</div><div><div><br></div><div><div><b><u>Factors affecting price elasticity of supply</u></b></div></div><div><b><u><br></u></b></div><div><b>Spare Capacity:  </b>If an industry is operating close to full capacity (i.e. all available resources are already being utilised), then firms are unable to produce much more even if prices rise. E.g. Australian mining industry during mining boom. PES is therefore likely to be inelastic. Industries with plenty of spare capacity are more likely to have elastic PES as when prices rise they can simply start employing some of the previously idle resources.<b><u></u></b></div> <div><br></div> <div><b>Production Period:</b> If a product takes a long time to produce, firms may not be in a position to quickly lift/reduce production in response to price changes. PES is therefore likely to be relatively inelastic (at least in the short-term). E.g. fresh fruit & vegetables If it is easy to lift/reduce production of a particular G/S in response to price changes, then PES is more likely to be relatively elastic E.g. manufactured goods.</div> <div> </div> <div><b>Durability/Storability:</b> Durable goods can be stockpiled by firms when prices are low. Firms can then release their inventory for sale when prices are high. Therefore, their PES is likely to be relatively elastic. E.g. wine, oil, processed food Products which are not durable and cannot be stored must be sold within a short time after they are produced or else they will spoil. PES is thus likely to be inelastic.E.g. fresh fruit & vegetables, services.</div></div>" "<div>Fill in the blanks below:</div> <div> </div> <div><b>a.<span style=""font-weight: normal;""> </span></b>“If a g/s has  ____________________ supply, then a(n)  ____________________ in demand will have a larger rise in price and a _______________ rise in quantity compared to if the g/s had unit elastic supply.” </div> <div> </div> <div><b>b.<span style=""font-weight: normal;""> </span></b>“If a g/s has _______________________  supply, then a(n) <a>_____________________</a> in demand will have a smaller rise in price and a _____________________ rise in quantity compared to if the g/s had unit elastic supply.”</div> <div> </div> <div><b>c.<span style=""font-weight: normal;""> </span></b>“If a g/s has _______________________  supply, then a(n) _____________________ in demand will have a smaller fall in price and a _____________________ fall in quantity compared to if the g/s had unit elastic supply.” </div> <div> </div> <div><b>d.<span style=""font-weight: normal;""> </span></b>“If a g/s has _______________________  supply, then a(n) _____________________ in demand will have a larger fall in price and a _____________________ fall in quantity compared to if the g/s had unit elastic supply.” </div> <div> </div> <div><b>e.<span style=""font-weight: normal;""> </span></b>“If a g/s has _______________________  demand, then a(n) _____________________ in supply will have a larger rise in price and a _____________________ fall in quantity compared to if the g/s had unit elastic demand.” </div> <div> </div> <div> <b>f.<span style=""font-weight: normal;"">  </span></b>“If a g/s has _______________________  demand, then a(n) _____________________ in supply will have a smaller rise in price and a _____________________ fall in quantity compared to if the g/s had unit elastic demand.”</div> <div> </div> <div><b>g.<span style=""font-weight: normal;""> </span></b>“If a g/s has _______________________  demand, then a(n) _____________________ in supply will have a larger fall in price and a _____________________ rise in quantity compared to if the g/s had unit elastic demand.” </div> <div> </div> <div><b>h.<span style=""font-weight: normal;""> </span></b>“If a g/s has _______________________  demand, then a(n) _____________________ in supply will have a smaller fall in price and a _____________________ rise in quantity compared to if the g/s had unit elastic demand.”<br> </div>"a. inelastic , increase , smaller<br>b. elastic , increase , larger<br>c. elastic , decrease , larger<br>d. inelastic , decrease , smaller<br>e. inelastic , decrease , smaller<br>f. elastic , decrease , larger<br>g. inelastic , increase , smaller<br>h. elastic , increase , larger "<div>What is the price mechanism?</div>""<div>The price mechanism = the system where the free forces of <b>demand</b> and <b>supply</b> for particular goods and services operate to set <b>relative prices</b> at the point of market <b>equilibrium</b>, in turn determining resource allocation</div>" "<div>What is resource allocation?</div>""<div>Resource allocation = deciding which goods and services that scarce resources will be used to produce, and in which quantities</div>" "<div>What are relative prices?</div>""<div>Relative price = the price of a good or service in terms of another</div>" "<div>How does a rise in relative prices impact resource allocation? </div>""<div>A rise in the relative price of a good or service due to an increase in demand will mean it is relatively more profitable for firms to produce that g/s. Therefore, more resources will be allocated to producing that g/s.</div> <div> </div> <div>However, if the relative price of a g/s has risen due to an increase in firms’ costs of production being passed onto consumers as higher prices in order to maintain profit margins, then consumers will substitute away from the relatively more expensive g/s. Thus, fewer resources will be allocated to producing that g/s.</div>" "<div>How does a fall in relative prices impact resource allocation? </div>""<div>A fall in the relative price of a good or service due to a decrease in demand will mean it is relatively less profitable for firms to produce that g/s. Therefore, fewer resources will be allocated to producing that g/s.</div> <div> </div> <div>However, if the relative price of a g/s has fallen due to an decrease in firms’ costs of production being passed onto consumers as lower prices in order to boost their market share without impacting their profitability, then consumers will substitute toward from the relatively cheaper g/s. Thus, more resources will be allocated to producing that g/s.</div>" "<div>How do competitive markets help to achieve allocative efficiency and improve living standards?</div>""<div>-Producers will follow relative price signals and allocate resources toward producing the g/s that consumers want, in order to maximise profits (consumer sovereignty) -They can enter markets to satisfy increased demand due to low barriers to entry and mobile resources, allowing the maximum satisfaction of society's wants and needs.</div> <div>Since consumers have greater access to the g/s that they value the most, material living standards are boosted.</div>" "<div>How do competitive markets help to achieve technical efficiency?</div>""<div>Since many firms are selling homogenous products, firms are competing on price alone. This imposes a discipline on firms to use the best production methods and minimise waste in order to lower costs and be able to offer lower prices to maintain/improve market share. Thus resulting in maximum output per unit of input and achieving technical efficiency.</div>" "<div>How do competitive markets help to achieve dynamic efficiency?</div>""<div>Firms will follow market trends and try to reallocate resources accordingly in order to maximise profits. -Low barriers to entry and mobile resources allow firms to QUICKLY reallocate resources as consumer preferences change, allowing dynamic efficiency to be achieved.</div>" "<div>How may competitive markets impact inter-temporal efficiency and living standards?</div>""<div>Since consumers and firms seek to maximise their own utility/profits, markets tend not to take the needs and wants of future generations into account. As a result, the allocation of resources is highly weighed toward the current demand of consumers and businesses do not readily conserve resources (nor to consumers forgo spending) in order to sustain resources for future generations and allow for future consumption at similar levels to present consumption.</div> <div>May negatively impact future living standards.</div>" "<div>What is meant by the term market failure?</div>""<div>Market failure is when the free operation of market forces results in an<b> inefficient allocation of resources</b> which does not maximise the satisfaction of society’s wants and needs (social welfare).</div>" "<div>With reference to their key characteristics, define public goods.</div>""<div>Public goods are certain g/s that are non-rivalrous (Consumption by one person does not lead to a reduction in the amount available for someone else) and non-excludable (The supplier of the good or service can not stop someone from consuming the good or service) in nature</div> <div>E.g. Street lights, lighthouses, police force, armed forces, free to air radio and TV broadcasts</div>" "<div>Why are public goods underproduced by the market?</div>""<div>Since they are non-excludable and non-rivalrous, consumers who don’t pay for the good or service can ‘<u>free ride</u>’ off other consumers who do pay. As a result, no-one will pay!</div> <div>This is known as the <u>‘free rider problem’</u>. It will therefore be<u> unprofitable for private firms to produce the good or service</u>, so they won’t! But, public goods are important goods and services which we do want and which improve our welfare. In a free market there will be an under-allocation of resources to public goods – i.e. less than the allocatively efficient / socially optimal amount that would maximise social welfare – and thus an inefficient allocation of resources results (market failure).</div>" "<div>How does the government increase the production of public goods (i.e., how does the government address the public goods market failure)?</div>""<div>1) Subsidies - Cash payments by the government to businesses to provide public goods. These help to cover a firms’ costs of production, increasing supply of the public good. E.g. street lights may be produced by a private company, but rather than charging consumers they receive their revenue from the government (funded by tax revenue).</div> <div>This raises the production and consumption of public goods (i.e. the amount of resources allocated to public goods) towards the allocatively efficient / socially optimal level.</div> <div>2) Direct government provision - The government provides the good or service themselves (funded by tax revenue), thus increasing the supply of the public good. E.g. defence. </div> <div>This raises the production and consumption of public goods (i.e. the amount of resources allocated to public goods) towards the allocatively efficient / socially optimal level.</div>" "<div>What is an externality?</div>""<div>Externality = a <b><u>cost</u></b> or <b><u>benefit</u> </b>associated with the <b><u>production</u></b> or <b><u>consumption</u></b> of a <b><u>good</u></b> or <b><u>service</u> </b>which impacts a <b><u>3<sup>rd</sup> party </u></b>(neither the buyer nor seller).</div>" "<div>Why do externalities lead to market failure?</div>""<div>There will be an over-allocation of resources to g/s   </div> <div>causing negative externalities  - more than the allocatively efficient / socially optimal amount - because the external costs of the production/consumption will not be taken into account by the producer/consumer.</div> <div>There will be an under-allocation of resources to g/s  causing positive externalities </div> <div>- less than the allocatively efficient / socially amount - </div> <div>because the external benefits of the production/consumption will not be taken into account by the producer /consumer</div>" "<div>How does the government primarily address negative externalities? (Use one example in your response to illustrate.)</div>""<div>An indirect tax increases firms’ costs of production, therefore resulting in a decrease in supply. Firms will pass on the extra cost to consumers as higher prices to preserve profit margins, causing a contraction in demand. Ultimately, a new equilibrium will be achieved at a higher price and lower quantity. </div> <div> </div> <div>Thus, the level of production/consumption of cigarettes (i.e. the amount of resources allocated to cigarettes) falls towards a more allocatively efficient / socially optimal level, correcting the market failure.</div>" "<div>How does the government primarily address positive externalities? (Use one example in your response to illustrate.)</div>""<div>A subsidy helps a firm to cover its costs of production, therefore resulting in an increase in supply. Firms will pass on the lower cost to consumers as lower prices, causing an expansion in demand. Ultimately, a new equilibrium will be achieved at a lower price and higher quantity. </div> <div> </div> <div>Thus, the level of production/consumption of education (i.e. the amount of resources allocated to education) rises towards a more allocatively efficient / socially optimal level, correcting the market failure.</div>" "<div>What are some other alternatives that the government can take to address positive or negative externalities?</div>""<div>Government advertising, government regulations</div>" "<div>With reference to their key characteristics, define the term ‘common access resources’.</div>""<div>Common access resources are productive inputs that are non-excludable (it is impossible to prevent non-paying consumers to consume the product, i.e. they can be accessed to all members of the community for consumption without payment), but they are rivalrous (meaning that one person's consumption of the resource prevents another person's consumption of the same resource).</div>" "<div>Explain why common access resources are an example of market failure.</div>""<div>Since common access resources are non-excludable (i.e. it is impossible to prevent or exclude non-paying consumers from using the resource) but rivalrous (i.e they are finite resources and the one person's consumption prevents another person's consumption), profit maximising firms try to gain the greatest benefit from the given resource, such as fish in open water, hence causing overuse and depletion of the resource. This hinders future generations from enjoying the same benefits from the resource and hence breaches allocative efficiency, causing a market failure.</div>" "<div>Define asymmetric information and describe the information asymmetry that occurs in false advertising (use Lorna Jane's ""Anti-virus activewear"" as an example).</div>""<div>Asymmetric information occurs in a transaction when one party knows more about the product than the other and therefore, consumers or producers may purchase adversely in a way that leads to an inefficient allocation of resources. Lorna Jane falsely advertised their ""Anti-virus activewear"" as being resistive against the COVID-19 virus, when it is in fact not resistant. In this case, some customers likely wouldn't have purchased the activewear had they known it wasn't resistive against the virus. Because some consumers bought a product they did not actually want, there was an over-allocation of resources to the falsely avertised product (more than the efficient/socially optimal amount).</div>" "<div>With reference to efficiency in resource allocation, explain how the government intervenes to prevent market failure caused by asymmetric information in the form of false advertising</div>""<div>Government regulations, specifically consumer law (Australian Competition and Consumer Act ). This makes misleading and deceptive conduct illegal. Firms that break this law face penalties. E.g. Coles had to pay  million. This creates a disincentive for firms to falsely advertise because it impacts their profitability, thus ensuring that consumers get accurate information and that resource allocation is more closely aligned with consumer wants. The allocation of resources to Coles bread would fall to the allocatively efficient/socially optimal level where only people who truly want the product are buying it, thus addressing the market failure.</div>" "<div>Explain how asymmetric information leads to a market failure in the used car market.</div>""<div>Since used car buyers cannot know if the car they are considering buying is a ‘plum’ (good car) or ‘lemon’ (bad car), they may hesitate to buy a used car.</div> <div> </div> <div>Further, owners of plums may resist selling them since they will not get a ‘fair’ price for their car (they will only get paid the ‘average’ price of a plum and lemon). </div> <div> </div> <div>As a result, a transaction that could have made both the buyer and seller better off is not undertaken and there will be an under-allocation of resources to the used car market in a free market (less than the ‘efficient’ amount), thus causing market failure. This may also lead to an over-allocation of resources to the market for new cars.</div>" "<div>Explain how the government intervenes in this market to address the market failure.</div>""<div>Government regulations, for example, licensed motor car traders must provide statutory warranties for used cars less than  years old. The warranty covers any faults discovered in the car in the first  months. They must also provide an Existing Defects Notice listing any known faults of the car. (https://www.consumer.vic.gov.au/cars/buying-a-used-car) </div> <div> </div> <div>This helps consumers gain more information and feel more confident about proceeding with the purchase. Therefore, more mutually beneficial transactions of used cars go ahead, the amount of resources allocated towards the used car market is lifted towards the allocatively efficient/socially optimal level, and the market failure is addressed.</div>" "<div>What is a government failure?</div>""<div>Government failure’ refers to a situation where government intervention in a market does not improve the allocation of resources, or actually makes the allocation of resources less efficient compared to what would happen in a free market situation.</div>" "<div>Explain one recent example of government intervention in markets that unintentionally led to a decrease in efficiency.</div>""<div>JobKeeper was a government intervention that led to unintended consequences and a decrease in the efficiency of resource allocation. During the Covid pandemic, employers were given subsidies to help pay their employees who could earn up to $1500 every fortnight if they had been working on the job for at least 12 months. This led to some casual workers being less willing to take on additional hours given that they were receiving payments from the government. This led to an increase in idle resources, reducing technical efficiency due to lower productivity. Additionally, some businesses limited their recorded or actual sales to qualify for JobKeeper payments, even when their actual turnover increased. This was not allocatively efficient because the funds could have been given to businesses who genuinely needed the payment or used for other more worthy causes. This was therefore not a socially optimal allocation of resources and lead to a decrease in efficiency of resource allocation.</div> <div> </div> <div>OR</div> <div>The minimum wage is set above the free market equilibrium wage. The purpose or intention of the minimum wage is to provide a safety net to low skilled workers. By artificially preventing the labour market from returning to equilibrium, the demand for labour contracts and the supply of labour expands. The minimum wage thus creates a surplus of labour where supply (job seekers) exceeds demand (job vacancies).  Thus, the minimum wage creates unemployment. Some firms may replace labour with capital, whilst other firms may move offshore.   Unemployment means that some (labour) resources are not being utilised, such that the economy is operating within the production possibility frontier and production is not being maximised.  If production is not being maximised, then we are not maximising the satisfaction of society’s want and needs. Therefore, allocative efficiency is not being achieved.  Since government intervention in the labour market has made the allocation of resources less efficient compared to what would happen in a free market situation, the minimum wage can be considered an example of government failure.</div>" <div>What are the factors that may impact living standards?</div>"<div>Access to goods and services, environmental quality, physical and mental health, crime rates and literacy rates.</div>" "<div>Explain how rising unemployment can impact both material and non-material living standards.</div>""<div>A rise in unemployment means that consumers do not have access to a factor income and therefore their disposable income (solely provided by welfare benefits which is less than the minimum wage) declines. Hence, they cannot purchase goods and services (compared to their previous levels) that will add to their satisfaction. Since their ability to consume goods/services declines (with their fall in income), so too does their material living standards. Unemployment brings with it many psychological and social impacts such as the mental stresses associated with not being able to provide for family, lack of fulfilment that often comes with work, and decline in self-esteem. All of these mental and social impacts lead to a decline in the quality of life of unemployed people and hence leads to a decline in non-material living standards.</div>" "<div>Explain how a deterioration in environmental quality can impact both material and non-material living standards.</div>""<div>A reduced environmental quality also reduces the availability and quality of land (natural resources) such as water and agricultural goods and hence decreases aggregate supply (causing a decrease in maximum level of production); since consumers' access to these goods/services is negatively impacted, so too is their material living standards. The quality of the environment is associated with the quality of individual's lives, as they live and work within the environment and are regularly exposed to it. A reduced quality of the environment may lead to a reduced quality of life such as polluted air (which impacts physical health and may reduce life expectancy) and lack of natural conservation (which can impact psychological health) and hence lead to a decline in non-material living standards.</div>" "<div>What are the five sectors in the circular flow model, and what are the roles of each of these sectors in the model?</div>""<div>· Households: Sell labour to firms, buy goods and services from firms</div> <div>· Businesses: Buy labour from households, produce goods and services</div> <div>· Government: Tax, government spending</div> <div>· Financial institutions: Savings, investment</div> <div>· External sector: Sell imports to Australia, buy Australian exports</div>" "<div>What are each of the leakages and injections in the circular flow model?</div>""<div>Leakages: Taxation, Savings, Imports</div> <div>Injections: Government Spending, Investment, Exports</div>" <div>Describe the four flows in the circular flow model.</div>"<div>Flow 1: The household sector provides factors of production (land, labour, capital) to the business sector.</div> <div> </div> <div>Flow 2: The business sector provides income to the household sector.</div> <div>·         For providing labour → wages, salaries, commission, royalties</div> <div>·         For providing land → rent</div> <div>·         For providing capital → dividends, interest</div> <div>            </div> <div>Flow 3: Aggregate demand for Australian goods and services (AD = C+I+G1+G2+X-M)</div> <div>·         Leakages</div> <div>·         Savings (financial sector)</div> <div>·         Taxes (government sector)</div> <div>·         Imports (overseas sector)</div> <div>·         Injections</div> <div>·         Investment (financial sector)</div> <div>·         Government spending (Government sector)</div> <div>·         Exports (overseas sector)</div> <div> </div> <div>Flow 4: Total final market value of a nation’s production or supply of goods and services (real GDP)</div>" "<div>What is aggregate demand, and what is the formula to calculate AD?</div>""<div>Aggregate Demand = the total level of expenditure/consumption of goods and services produced in Australia over a period of time (usually a year) </div> <div>AD = C+I+G1+G2+(X-M)</div>" "<div>Fill in the following table. </div><div><img src=""paste-ef2431b68b0416979788ec9aadea18b41a741354.jpg""><br></div><div><img src=""paste-043be3b0a08903925a1b2c3b3f1d5ccf3c02162f.jpg""><br></div><div><img src=""paste-fd35ea7f70bbd09845b73ee53d3ff1b6002e3c17.jpg""><br></div>""<img src=""paste-666b0fe5d03ee35cfd75c7fbd5dbdab333ebcf87.jpg""><br><img src=""paste-c0747c3269abccc4a4202b1857650a458cee109a.jpg""><br><img src=""paste-8e6d18715edf1f783e7a0755a6fcfd0250e18998.jpg"">" "<div>What is the relationship between the general price level and Aggregate Demand? </div>""<div>A) General price level  Aggregate Demand</div> <div>a.       Wealth effect</div> <div>Higher average prices (general level of prices) reduces purchasing power of savings in real terms and so the public feels on average poorer as real wealth is falling.</div> <div>Consumers are then less likely to spend (Aggregate Demand contracts)</div> <div> </div> <div>b.       Interest rate effect</div> <div>When average prices or inflation are higher, interest rates also rise. (mainly due monetary policy decision-making). </div> <div>This makes borrowing money from banks more expensive, contracting spending levels.</div> <div> </div> <div>c.       International competitiveness (this is the easiest explanation!)</div> <div>If the general price level in Australia rises and prices overseas remain the same, foreigners will buy fewer Australian exports as they are relatively more expensive, and Australians will buy more imports as they are relatively cheaper.</div> <div>A fall in Export Spending and a rise in Import Spending leads to a net contraction in Aggregate Demand.</div> <div> </div> <div>B) Aggregate Demand  General Price Level </div> <div> </div> <div>This will lead to shortages (especially if the economy is near productive capacity), causing consumers to ‘bid up’ prices, thus increasing the level of demand inflation</div>" <div>What is the ‘business cycle’ and what does it describe?</div>"<div>Describes the wave-like or cyclical movement of Aggregate Demand and domestic economic activity (measured by changes in real GDP) over time, passing through 4 phases (expansions, peaks, contractions, troughs).</div>" <div>What is associated with economic expansion?</div>"<div>The upswing of the business cycle towards a peak is called an economic expansion. </div> <div>An economic expansion is associated with:        </div> <div>· Increase in production/output – As the economy expands, business generally see an increase in sales or demand for their products. They will produce more goods and services to meet this increase in demand.</div> <div> </div> <div>· Decrease in unemployment – As business need to produce more goods and services to meet demand, they need to hire more workers. Consequently, the level of unemployment declines.</div> <div> </div> <div>· Increase in wages – Because businesses are doing well, they need to attract and keep workers by    offering higher wages.</div> <div> </div> <div>· Increase in consumer spending – As people are earning higher wages, they spend more money in the economy – adding to demand.</div>" <div>What is associated with an economic contraction?</div>"<div>The downswing of the business cycle towards a trough is called an economic contraction. </div> <div>It is associated with: </div> <div>· <b>Decrease in production/output</b></div> <div>As the economy contracts, businesses generally see a decrease in sales or demand for their products. Businesses will respond to this reduction in demand by producing fewer goods and services<b></b></div> <div>· <b>Increase in unemployment</b></div> <div>As businesses don’t need to produce as much to meet demand, some businesses will reduce the size of their workforce by letting go of some of their employees. This increases the number of unemployed workers.<b></b></div> <div>· <b>Decrease in wages</b></div> <div>Because businesses are doing less well, they don’t need as many workers. They can attract enough workers at lower wages. </div> <div>Workers are willing to accept lower wages, as the increase in unemployment has meant there is more competition for jobs. <b></b></div> <div>· <b>Decrease in consumer spending</b></div> <div>Because people are earning lower wages, they spend less on goods and services. They may be more concerned about losing their job, so they may be more likely to save, rather than spend, their money.<b></b></div>" "<div>What are some of the more extreme conditions of the business cycle?</div>""<div><b><u>Boom</u></b><b> =</b> A period of strong economic expansion where many businesses are operating at full capacity or above capacity, and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.</div> <div> </div> <div><b><u>Recession</u></b><b> =</b> When output has fallen for a period of time and the unemployment rate increases. </div> <div> </div> <div><b><u>Depression</u></b><b> =</b> A very severe recession. There is a large contraction in the economy, and the unemployment rate is likely to be at a very high level.</div>" "<div>Complete the table summarising the characteristics of the  phases of the business cycle:</div><div><img src=""paste-d39e2cf4d517487e61e8bcd9d3e553fbafdfe50d.jpg""><br></div>""<img src=""paste-0b71825c825b58d064979997451f6fc18fc8cc3d.jpg"">" <div>Define Aggregate Supply and Productive Capacity.</div>"<div><b>Aggregate Supply =</b> The overall level of production of all types of goods and services that are collectively produced or supplied at given general levels of prices, by the nation’s businesses, measured over a period of time. </div> <div> </div> <div><b>Productive Capacity =</b> The economy’s physical limit to produce goods and services when all resources are used to maximum efficiency.</div>" "<div>Fill in the following table. </div><div><img src=""paste-061ad9f372492dc22f2a1921e8f27d74050708ec.jpg""><br></div><div><img src=""paste-5aa93fb51e1be89bfb98ec1f3d0a7a5c3d325d0f.jpg""><br></div><div><img src=""paste-a71942475c384f818fb2e38c74eb50c28877ef6f.jpg""><br></div><div><img src=""paste-a2d31ac385250da446c9ccbdbc932be7d0cad545.jpg""><br></div>""<img src=""paste-0cd3ed2503b8d349c9410d92bf2dc2ff85500d7d.jpg""><br><img src=""paste-7ab743908ba82881a62a39a4010a52585dc737a2.jpg""><br><img src=""paste-3e79caabcb32425d089b44cd50ea985dfa051afb.jpg""><br><img src=""paste-e924a7d8e7a1310866678ef82fa59dd4512f4cd7.jpg"">" "<div>Explain what is meant by the goal of strong and sustainable economic growth.</div>""<div>“Strong and sustainable economic growth is the fastest rate of increase in the production of goods and services (to generate strong employment growth) that does not cause inflationary, external or environmental pressures. The unofficial target is an annual rise in real GDP of 3-3.5%.”</div>" <div>Define Real Gross Domestic Product (Real GDP).</div>"<div>Real GDP (Gross Domestic Product) is a measure of the economic output of a country (i.e., the total market value of all final goods and services produced in Australia in a period of time) adjusted for inflation.</div>" "<div>Outline the steps required for the RBA or the ABS to calculate real GDP.</div>""<div>· <b>Gather Nominal GDP Data:</b> Start by collecting data on the nominal GDP for a specific period. Nominal GDP is the total value of all goods and services produced within a country's borders during a particular time frame, without adjusting for inflation.</div> <div>· <b>Select a Base Year:</b> Choose a specific year as the base year. The base year serves as a reference point for comparing the values of goods and services in different years. The real GDP calculation compares the nominal GDP of other years to the prices of the base year.</div> <div>· <b>Gather Price Index Data:</b> Collect data on a price index, such as the Consumer Price Index (CPI) or the GDP Deflator. These indices track changes in the general price level of goods and services in the economy over time.</div> <div>· <b>Calculate the Price Index Ratio: </b>Calculate the ratio of the chosen price index for the base year to the price index for the year you're interested in. This ratio is used to adjust the nominal GDP of the target year to reflect changes in prices since the base year.</div> <div>· <b>Price Index Ratio</b> = Price Index in Target Year / Price Index in Base Year</div> <div>· <b>Calculate Real GDP:</b> Multiply the nominal GDP of the target year by the price index ratio calculated in the previous step. This adjusts the nominal GDP to account for changes in prices and expresses it in terms of the prices of the base year.</div> <div>· <b>Real GDP =</b> Nominal GDP in Target Year/Price Index Ratio</div>" "<img src=""paste-1fb2442a0f1030f96e14b5eb998a7356df89b7bf.jpg""><br><div>Calculate the ‘year on year’ growth rate for the year to end December .</div>""<div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div><div> </div>4.30%" "<div><img src=""paste-9f0f0750a385d99f8e43b9e5e8187d63f0d38941.jpg""><br></div><div>Calculate the rate of growth for the December quarter of  and the annualised growth rate for the same quarter.</div>""<div> </div><div> </div><div> </div><div> </div><div> </div><div> </div>1.04% , 4.17%" "<div>Account for the difference in your answers to the previous questions.</div>""<div>The annual growth figure in the first question compares the growth throughout the year by comparing the total production in the months of October, November and December 2024 to the same three months in 2023. The annualised figure compares the growth in the December quarter 2024 to the September Quarter 2024 and multiplies this figure by four to arrive at an annualised figure.</div>" "<div>Write down formulas to calculate annual, quarterly and annualised real GDP growth rates.</div>""<div>Annual = gdpy2-gdpy1/gdpy1</div> <div>Quarterly = gdpq2-gdpq1/gdpq1</div> <div>Annualised = gdpq2-gdpq1/gdpq1 * 4</div>" "<div>Describe the relationship between strong rates of economic growth, and the level of unemployment. </div> <div> </div> <div>Hence, explain one reason why Australia targets an economic growth rate of above .</div>""<div>• Economic growth [i.e. growth in real GDP] is typically expected to increase employment [particularly if growth is above the rate of labour productivity] because more goods and services are being produced, which ordinarily requires more</div> <div>• resources (such as labour) to be used by businesses as inputs in the production process. </div> <div> </div> <div>Accordingly, businesses will tend to increase their demand for labour, create more jobs and increase employment. [However, if the rate of economic growth is below the rate of productivity growth or firms become more automated then employment might fall despite the existence of economic growth].</div> <div>Technology, Number of Suppliers</div>" "<div>Explain one consequence of having economic growth rates that are too ‘weak’ (i.e., < 3%).</div>""<div>Governments wish to avoid unemployment as it is a waste of valuable resources, the negative impacts it can have on people’s psychological wellbeing and the high correlation between high unemployment rates and increased crime and social unrest.</div> <div>Note: For countries to reduce their unemployment rates economic growth must also be fast enough to create enough jobs to cater for an expanding labour force.</div> <div> </div> <div>It is possible for employment rates to increase due to increased economic growth but unemployment to also increase as the overall size of the labour force is larger. </div> <div> </div> <div>It is important for countries to grow at a rate fast enough to account for any increases in the size of the labour force.</div> <div>Unemployment worsens both MLS and NMLS and therefore it is critical to ensure strong rates of economic growth to create extra jobs. </div> <div> </div> <div>Higher employment levels will also involve a greater sharing of the income gains from economic growth further helping to boost material living standards or welfare.</div>" "<div>Explain one way in which excessive rates of economic growth can cause a decrease in non-material living standards.  </div>""<div>An excessive rate of growth in GDP (e.g. bigger than 4% per annum) is likely to lead to a deterioration in the quality of life for the average Australian. This is because it can create excessive negative externalities in production and consumption, such as carbon pollution, depletion of resources such as forests and increased stress at workplaces.  This reduces the enjoyment of life for the average Australian and diminishes non-material living standards.</div>" "<div>What are the consequences of “unsustainable” rates of economic growth (i.e., growth rates well above 3.5%)?</div>""<div>It is unsustainable because:</div> <div>1) In the short-term, growth is usually driven by rises in AD. If AD approaches productive capacity, shortages develop and demand inflation occurs. This erodes our purchasing power, reducing material living standards.</div> <div>2) Rapid domestic growth leads to ‘spillover’ spending on imports, worsening the trade balance.</div> <div>3) Increased growth likely means increased pollution and resource depletion, damaging the ability of future generations to produce.</div>" "<div>Explain what is meant by the government’s goal of full employment.</div>""<div>“Full employment is the level of unemployment which exists when there is no cyclical unemployment, and the unemployment rate is as low as possible without going below the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This is believed to be an unemployment rate of around 4-4.5%’. (or perhaps lower).</div>" "<div>Define all the key “labour market states” in which citizens of Australia are classified.</div>""<div>• Employed = A person 15+ has a paid job (working at least 1 hour per week).</div> <div> • Unemployed = A person 15+ does not have a paid job but is actively looking for work.</div> <div> • Labour Force = People aged 15+ (working age) that are willing and able to work</div> <div> • Not in Labour Force = People aged 15+ (working age) that are not willing and able to work</div><div><img src=""paste-71a041aab3f8195f2d518a300e978d3123f3bc43.jpg""><br></div>" "<div>What are the different ‘types’ of unemployment, and what are their definitions?</div>""<div><b>Hidden unemployment’ (‘discouraged job seekers’)</b> = Those people who would like a job but do not feel confident about getting one, so have given up looking. Since they are not ‘actively looking for work’, they are not counted as unemployed and the unemployment rate may be underestimated.</div> <div><b>‘Underemployment’ (‘disguised unemployment’) =</b> When a person has a job, but are not working as many hours as they would like. These people do not appear as unemployed because they have a paid job, but may still be seeking a job elsewhere.</div> <div><b>Natural unemployment =</b> Unemployment which exists even when cyclical unemployment is non-existent </div> <div>Long -Term: 1yr+</div><div><img src=""paste-915f9471a8c801419bac717f88b4ce050f5a76cd.jpg""><br></div><div><img src=""paste-f6bcc120b7a8ef5714efa1e7cecffd22c4719557.jpg""><br></div>" "<div>Define each of the following measures, and state the formula to calculate them: </div> <div><b>a.<span style=""font-weight: normal;""> </span></b>Unemployment Rate</div> <div><b>b.<span style=""font-weight: normal;""> </span></b>Participation Rate</div> <div><b>c.<span style=""font-weight: normal;""> </span></b>Underemployment Rate<br></div>""<div><b>a.<span style=""font-weight: normal;""> </span></b>Unemployment Rate</div><div><img src=""paste-b8e47c3cca47d87047829be406eb036aedd99f9a.jpg""><br></div><div><b>b.<span style=""font-weight: normal;""> </span></b>Participation Rate</div><div><img src=""paste-fb1729b5e64c861400cd89b029614f5cba37ddea.jpg""><br></div><div><b>c.<span style=""font-weight: normal;""> </span></b>Underemployment Rate</div><div><img src=""paste-db90f4c3e37721ac83acd2132adfe84c5b333871.jpg""><br></div><div><img src=""paste-d82801a3ca94a86f1c1c6aa7eea87850e2b99c83.jpg""><br></div>" <div>Distinguish between cyclical and structural unemployment.</div>"<img src=""paste-daebfbd0b7be1a4487aba34b1beb7e10c406218a.jpg"">" "<div>What is meant by ‘strong’/‘tight’ and ‘weak’/’slack’ labour market conditions?</div>""<img src=""paste-0907c5c5319e969cf848b06c73a33930f4cccd42.jpg""><br><div>• <b>Weak (LOOSE) =</b> Supply of labour exceeds demand for labour</div> <div>• Tendency for increased unemployment</div> <div>• <b>Strong (TIGHT) =</b> Demand for labour exceed the supply of labour<br></div> <div>Tendency for declining unemployment</div>" "<div>What are the consequences of having unemployment rates that are too high?</div>""<div><b>• Loss of GDP</b></div> <div>(1) Unemployment means that some labour resources are not being utilised and thus the economy is not operating at its productive capacity.</div> <div>(2) Miss out on the ‘multiplier benefits’ of employment i.e. employed people have higher disposable incomes which are spent on good and services, therefore increasing C, AD and GDP and in turn creating additional employment and incomes.</div> <div>(3) If people become ‘long-term unemployed’ (unemployed for more than a year), they lose their skills, which will negatively impact labour productivity, Aggregate Supply and GDP.</div> <div> </div> <div><b>• Loss of tax revenue:</b></div> <div> </div> <div>-With fewer people earning factor incomes, personal income tax receipts (the government’s largest source of revenue) will fall</div> <div>-The government will also have to spend more on welfare (unemployment benefits)</div> <div> -This means that the government must either:</div> <div>            (1) Tax employed people more: reducing their disposable income and            access to goods and services (↓MLS)</div> <div>            (2) Spend less on other goods/services which improve material or non-material living standards e.g. spend less on healthcare, meaning more people get sick and stay sicker for longer, reducing their quality of life (↓NMLS)</div> <div> </div> <div><b>Income inequality</b></div> <div>-Unemployment tends to impact low income earners (unskilled workers)</div> <div>-Transfer income (welfare) is lower than factor income (wages/salaries)</div> <div>-Therefore, low income earners will earn a smaller share of total income</div> <div>-The gap between high and low income earners will widen and the distribution of income will become less equal</div> <div> </div> <div><b>Reduction in living standards</b></div> <div>Material: Since unemployment benefits pays less than the full-time minimum wage, unemployed people have a reduced capacity to purchase goods and services, so their material living standards fall.</div>" " <p class=""MsoNormal""><span lang=""EN-AU"">Why does unemployment that is too low (i.e., below the NAIRU) cause inflation?<o:p></o:p></span></p>""<img src=""paste-66bc26c5c9bebe0a3591aa3c03df025134cc9428.jpg"">" <div>Explain what is meant by the goal of ‘low and stable inflation.’</div>"<div>“The goal of low inflation is for the general price level to rise between 2-3% per year on average over time (measured by changes in the Consumer Price Index)”.</div>" <div>Define the terms inflation, disinflation and deflation.</div>"<div>• <b>Inflation =</b> A sustained rise in the general / average price level</div> <div>• <b>Deflation =</b> A sustained fall in the general / average price level</div> <div>• <b>Disinflation =</b> A fall in the rate of inflation i.e. a fall in the rate at which prices are rising<br></div>" "<div>Describe all the key characteristics of the Consumer Price Index and how it is used to calculate rates of inflation.</div>""<div>• Inflation is measured by changes in the…</div> <div>• Consumer Price Index (CPI).</div> <div>•  This measures quarterly changes in the retail prices of a basket of goods and services, both locally made and imported, that represent a high proportion of the expenditure of metropolitan households in the capital cities, weighted according to their relative importance to Australian households.</div><div><img src=""paste-bb46a176ab123ef69a81a6c85f44bffd86bb4872.jpg""><br></div><div><img src=""paste-fedf977ae1e1236730a8595653530410bd8aa603.jpg""><br></div>" "<div>Using the table below, calculate the annual, quarterly and annualised growth rates for the period ending June .</div><div><img src=""paste-dccc1582ffe1078df773b604d0f982a03cac766e.jpg""><br></div><div><br></div>""<img src=""paste-d5178f6b1367cde3aa13c48e635f3fad45bf357c.jpg"">" "<div>What are “underlying” rates of inflation as opposed to “headline” rates of inflation? What are the measures for underlying inflation?</div>""<img src=""paste-afbbfc0df0f691df781fa40fb511a8921c8c5ab7.jpg""><br><img src=""paste-95f85b3f910c9878977374e06cf0e8af6039a312.jpg"">" "<div>What are the two different ways inflation can occur in the economy?</div>""<img src=""paste-cc87b3ced2bc4be68e2a699de759ba0f0d032b01.jpg""><br><img src=""paste-4c0e027964e6905d56198a531a51a1a4abe9444f.jpg"">" "<div>What are the consequences of having inflation rates that are too high (i.e., above 3%)?</div>""<div>When inflation is too high (>>3%), it can lead to:</div> <div> </div> <div><b>1. An erosion of consumers’ purchasing power</b></div> <div>· If, over a period of time, prices at a faster rate than nominal incomes, fewer goods can be purchased (i.e. real incomes fall).</div><div>NOMINAL {____} = REAL {_____} + INFLATION</div> <div>· Lowers material living standards</div> <div>· [Even if employees can negotiate pay rises in line with inflation, the rise in their nominal income may push them into a higher personal income tax bracket. This means they will pay a higher marginal rate of tax, thus reducing their real disposable income.<br></div> <div>· This is known as bracket creep or fiscal drag.]</div> <div> </div> <div><b>2. A fall in international competitiveness </b></div> <div>· If Australian-made goods & services rise in price at a greater rate than foreign-made goods & services, Australian firms in the tradable sector (i.e. exporting firms and import-competing firms) will become less internationally competitive in terms of price.</div> <div>· A fall in exports (X) and rise in imports (M) leads a contraction in AD and economic growth, in turn causing higher unemployment.</div> <div>· → Lower incomes</div> <div>· → lower material living standards<br></div> <div> </div> <div><b>3. Lower returns on investment</b></div> <div> </div> <div>· Inflation influences investment decisions because a higher inflation rate will reduce the real return on the investment. </div> <div>· Inflation can also affect the real interest paid by borrowers to lenders.<br></div> <div>· For example, if inflation turns out to be higher than expected when the loan was agreed, the lender will get less than they had planned because inflation reduces the purchasing power of the interest earnings they receive.</div><div><img src=""paste-84fe23e0c42184e0df9bd51a453e0feae64256d1.jpg""><br></div><div><img src=""paste-19b1635ba2c32698ecd7f927c97b76d9ddef3bd3.jpg""><br></div><div><div><b>4. The development of a wage-price spiral</b></div></div><div><img src=""paste-f92cee2212c81d73c8000a9f3820decc6e96509e.jpg""><br></div><div><div><b>5. A distortion of spending and investment decisions</b></div> <div>· High inflation may result in greater spending now, and less saving/investment for future consumption, to minimise losses associated with holding money (the value of which is falling). </div> <div>· This means there are fewer funds available for banks to lend for investment. </div> <div>· High inflation also creates greater uncertainty for firms, reducing business confidence and therefore investment.</div> <div>→ Slowed economic growth in the future </div> <div>→ lower MLS</div> <div>· In addition, high inflation makes it less attractive to save/lend and more attractive to borrow because the borrower will pay back less in real terms. </div> <div>· e.g. If the interest rate is 10% and the inflation rate is 5%, then the value of interest earned/paid is halved, thus discouraging saving / lending and encouraging borrowing.</div> <div>· i.e. inflation is bad for savers, but good for borrowers!</div> <div> </div> <div>When there is inflation, speculative investments tend to rise in price faster than the general inflation rate e.g. gold, artwork. Therefore, investors will be motivated to take their money out of productive uses such as business investment and redirect it into speculative investments. This may lower productivity and cause a less efficient allocation of resources.</div> <div>            → Less efficiency </div> <div>            → Lower AS  </div> <div>            → Lower long-term growth </div> <div>            → Lower material living standards</div></div>" " <p class=""MsoNormal""><span lang=""EN-AU"">Fill in the current statistics below:</span></p><p class=""MsoNormal""><span lang=""EN-AU""><img src=""paste-fe1691c877d2d0739ea2bfdcd834e71c9c661b0c.jpg""><br></span></p><p class=""MsoNormal""><span lang=""EN-AU""><img src=""paste-cd00b1a5c5f804d70b6d1eda43707b65b1d9bf6b.jpg""><br></span></p><p class=""MsoNormal""><span lang=""EN-AU""><img src=""paste-1cfc9113bc6e66ebbebd068c3e0290998b3958fe.jpg""><br></span></p><p class=""MsoNormal""><span lang=""EN-AU""><img src=""paste-ca1d900efae62087d4c66410fee5413367d5f531.jpg""><br></span></p>""<img src=""paste-81ec28f3ac552e2a5035bea7e6810f220ea60de6.jpg""><br><img src=""paste-a9e46c2582e8b0d15afb8be7e7cb4154524ea2e8.jpg""><br><img src=""paste-8e244ff972d15cfea9913c13688db30f68082e45.jpg""><br><img src=""paste-0a88ba48d1fc5693e7dd6657cdeb4e4f034df5a6.jpg"">" "<div>What are the five ways in which trade improves living standards?</div>""<div>Lower prices, greater choices, access to resources, economies of scale, and increased competition and efficiency.</div>" <div>How do economies of scale help to improve living standards?</div>"<div>Economies of Scale = the fall in average costs per unit which firms experience when they produce a large amount of output, due to the fact that fixed costs can be spread out over a higher amount of goods produced. International trade allows Australian firms to sell to a larger market, enabling them to achieve economies of scale.  This means that firms can sell their products at lower prices to consumers to maintain the same profit margins  This increases the purchasing power of consumers, allowing them to purchase more goods and services with the same nominal incomes (increasing their real incomes). Hence, material standards rise.</div>" "<div>Referring to competition, explain how trade can lead to lower prices for consumers.</div>""<div>Trade should result in lower production costs and therefore reduced cost inflation due to: </div> <div>• 1) The ability of firms to achieve economies of scale, </div> <div>• 2) Countries specialising in producing those goods and services in which they have a comparative advantage, and</div> <div>• 3) Increased competition provided by exposing local firms to foreign competitors imposing greater discipline on firms to improve productivity. Link to living standards: with lower prices, purchasing power rises and more goods and services can be purchased with a given nominal income i.e. material living standards rise.</div>" "<div>Explain two more reasons why trade is beneficial.</div>""<div>1. Access to more resources • Access more productive inputs from other countries that facilitate a large volume of production within Australia (i.e. labour inputs through immigration, oil through trade). E.g. Australia has plentiful iron ore and coal deposits, but it does not have many oil deposits, both of which are important resources used by businesses to produce goods and services. Therefore, Australia can export iron ore and coal to those countries that do not have these resources but need them, e.g. China. Australia can import oil/petrol from countries that have this resource, e.g. Saudi Arabia.</div> <div> </div> <div>2. Greater Choice for consumers Exposing Australian consumers to internationally produced goods and services gives them a far greater choice of goods and services than previously. E.g. Consider some of Australia’s service imports, such as Foreign entertainment and Tourism.</div>" "<div>What is meant by the structural and cyclical components of the current account balance?</div>""<div>Structural component = the ongoing CA balance that exists when the economy is running at its long run trend rate of growth (approximately 3% per annum)</div> <div> </div> <div>Cyclical component of the CA = the change to the CA balance which occurs in line with the economic cycle.</div><div><img src=""paste-729ea1247db916c49ca70fb7f408d96a1d450828.jpg""><br></div>" "<div>Explain two structural influences on Australia’s current account balance.</div>""<div><b></b></div><div><b>∙ </b>Australia’s <b>Savings-Investment imbalance</b>:</div> <div> - Australian households have historically not saved enough to fund business investment.</div> <div> - This imbalance must be filled by foreign  funds.</div> <div> - This has resulted in a build-up of <b>net foreign debt</b> which must be repaid with interest (primary incomes debits) thus causing an ongoing <b>structural CAD</b>.</div><div><br></div> <div><b></b></div><div><b>∙ </b><b>Poor international competitiveness</b>:</div> <div> - High-cost structures and low levels of efficiency in Australia compared to many other countries results in Australian firms having poor international competitiveness in terms of price.</div> <div> - This results in fewer export sales overseas (<b>goods and services credits</b>) and more import purchases domestically (goods and services debits).</div> <div> - This negatively impacts <b>the balance of  trade</b> (the<b> balance on merchandise  trade</b> and <b>net services</b>), in turn  causing an ongoing <b>structural CAD</b>.</div>" "<div>Explain how ‘cyclical’ factors can influence Australia’s current account balance. </div> <div><b>Hint:</b> “spill-over” spending<b></b></div>""<div>The CAS tends to decrease (or the CAD tends to increase) during periods of strong AD and economic growth because:</div> <div> </div> <div><b></b></div><div><b>∙ </b>Strong spending tends to spill over onto greater import demand (goods and services debits)</div> <div> - The trade surplus will decrease, in turn decreasing the  CAS.</div> <div><b></b></div><div><b>∙ </b>The gap between investment and savings gets bigger.</div> <div> - More borrowing is required from overseas to fund investment, reducing the CAS because of increased interest  repayments (primary incomes debits).</div>" "<div>What factors led to Australia’s achievement of its first Current Account Surplus in 44 years in June 2019?</div>""<div><b></b></div><div><b>∙ </b>In June , Australia recorded its first current account surplus in  years.</div><div><b></b></div><div><b>∙ </b>The current account balance has remained in surplus since</div><div><b></b></div><div><b>∙ </b>Why?</div> <div><b></b></div><div><b>∙ </b>Australia’s trade balance has been a significant surplus due to:</div> <div> - China’s increased construction spending. This has increased demand for Australian iron ore and coal (increasing <b>goods credits</b> in the CA).</div> <div><b></b></div><div><b>∙ </b>Australia’s primary incomes deficit has fallen significantly, due to:<br></div> <div> - Low interest rates globally, reducing the size of interest repayments going overseas (decreasing <b>primary incomes debits</b> in the CA).</div> <div> - An increase in national savings has decreased the Savings-Investment imbalance, meaning Australian firms do not need to borrow as much from overseas, reducing the size of subsequent interest payments going overseas (decreasing <b>primary incomes debits </b>in the CA).</div> <div> </div> <div><b></b></div><div><b>∙ </b>With a large trade surplus, and smaller primary incomes deficit, the overall current account has recorded a surplus.</div> <div> </div>" "<div>What is the definition of Net Foreign Liabilities, what are its components and what information does it give us?</div>""<div>Net Foreign Liabilities (Net International Investment Position)  = Australian’s financial obligations to the rest of the world, minus the rest of the world’s financial obligations to Australians. </div> <div>This is made up of: </div> <div> </div> <div><b></b></div><div><b>∙ </b><i>Net Foreign Debt (NFD), and</i></div><div><b></b></div><div><b>∙ </b><i>Net Foreign Equity (NFE)</i></div> <div><i> </i></div> <div>Examining Australia’s NIIP helps determine Australia’s ability to meet its international financial obligations, i.e. how ‘externally stable’ Australia is.</div>" "<div>What is Net Foreign Debt, and how do we calculate it?</div>""<div>How much Australians have borrowed from foreign lenders minus how much Australians have lent to foreign borrowers.</div>" "<div>What is the significance of Net Foreign Debt on Australia’s Net Foreign Liabilities, and what are the components of Net Foreign Debt?</div>""<div>Two components of foreign debt:</div> <div> </div> <div><b></b></div><div><b>∙ </b>Public sector (government) borrowing:</div> <div> - Used to fund budget deficits</div> <div> - Around 24% of NFD </div> <div><br></div><div><b></b></div><div><b>∙ </b>Private sector (non-official) borrowing:<br></div> <div> - Large companies borrowing for expansion, or</div> <div> - Banks sourcing funds to lend to Australian firms and households</div> <div> - Constitutes the vast majority of our NFD </div> <div> </div> <div>By far the largest component of Australia’s Net Foreign Liabilities. In fact, it makes up more than 100% of Australia’s Net Foreign Liabilities. It is therefore the most common statistic used to determine the ability of Australia to meet its international financial obligations, i.e. if Australia is ‘externally stable’.</div>" "<div>What are Net Foreign Equities, and how do we calculate it?</div>""<div>The value of Australian assets owned by foreigners, (e.g. property, shares, businesses, land) minus the value of foreign assets owned by Australians.</div>" "<div>What can we say about the current level of Net Foreign Equities, and what does this signify about Australia’s net foreign asset ownership?</div>""<div>By far the smallest component of Australia’s <u>Net Foreign Liabilities</u>.</div> <div>In fact, since  Australia’s NFE has been negative, indicating that the ownership of foreign assets by Australians exceeds foreign ownership of Australian assets.</div>" "<div>What is the exchange rate? And what are the two common ways of measuring an ‘exchange rate’?</div>""<div><b><u>Exchange Rate = </u></b> The value of the Australian dollar when compared to another currency, or a basket of currencies of our major trading partners. </div> <div> </div> <div><b></b></div><div><b>∙ </b><b>(Bilateral) Individual exchange rates </b>= Relative price of <i>one currency</i> in terms of another</div> <div>Example: If USD buys one AUD, the bilateral USD/AUD<br></div><div> nominal exchange rate is E USD per AUD</div> <div><br></div> <div><b></b></div><div><b>∙ </b><b>Trade Weighted Index (TWI)</b> = The average exchange rate compared to a weighted basket of foreign currencies of Australia’s trading partners. </div>" "<div>What do we mean by a ‘floating’ exchange rate?</div>""<div>Australia’s exchange rate is <b>floating</b>, meaning its value is determined by the forces of demand and supply.</div>" "<div>What do we mean by the ‘demand’ and ‘supply’ for/of the AUD?</div>""<div><b></b></div><div><b>∙ </b>The DEMAND for Australian dollars refers to how much foreign currency is being converted into Australian dollars.  </div><div><b></b></div><div><b>∙ </b>ANY FOREIGN CURRENCY → AUD = DEMAND<br></div> <div><b></b></div><div><b>∙ </b>The SUPPLY of Australian dollars refers to how many Australian dollars are being converted into foreign currency. <br></div> <div><b></b></div><div><b>∙ </b>AUD  → ANY FOREIGN CURRENCY = SUPPLY<br></div>" "<div>What are the different factors that affect the exchange rate? Explain how each of these factors may lead to an <b>appreciation or depreciation</b> of the Australian dollar.</div>""<div><b></b></div><div><b>∙ </b>Demand for exports and imports</div> <div><b></b></div><div><b> - ↑</b>Demand for Australian exports means that more foreign currency needs to be converted into AUD to pay for these exports, causing an increase in demand for <b>↑</b></div><div><b></b></div><div>AUD and in turn an appreciation.</div> <div><b></b></div><div><b> - ↑</b>Demand for foreign imports means that more AUD needs to be converted into foreign currency to pay for these imports, causing an increase in the supply of AUD and in turn a depreciation.</div> <div> - Relative interest rates.</div> <div><b> </b></div> <div><b></b></div><div><b>↑</b>in Australia’s interest rate differential results in:</div> <div> </div> <div><b></b></div><div><b>↑</b>for overseas investors to invest in Australian currency assets, thus increasing capital inflow (which needs to be converted into Australian dollars), causing an <b>increase in demand</b> for AUD, and</div> <div> </div> <div>Less incentive for Australian investors to invest in foreign currency assets, thus decreasing capital outflow (which needs to be converted into foreign currency), causing a <b>decrease in the supply</b> of AUD.</div> <div> </div> <div>The result is an <b>appreciation</b> of the AUD.</div> <div><b> </b></div> <div><b></b></div><div><b>∙ </b><b>Commodity Prices and the Terms of Trade</b></div> <div><b></b></div><div><b></b></div><div><b>∙ </b><b>↑</b>Terms of trade (i.e. export prices rise relative to import prices), it is typically because commodity prices have risen.<b></b></div> <div><b></b></div><div><b>∙ </b>This means that Australian commodity exporters now receive more income for any given quantity of commodities exported (demand is relatively inelastic).<b></b></div> <div><b></b></div><div><b>∙ </b>This means that more foreign currency must be converted into AUD to pay for these commodities, causing an <b>increase in demand </b>for AUD.<b></b></div> <div><b><br></b></div><div><b></b></div><div><b>∙ </b><b>Relative rates of inflation (i.e., International Competitiveness)</b><br></div> <div><b> </b></div> <div>If prices rise at a slower rate in Australia compared to our trading competitors, then Australian firms will become more internationally competitive in terms of price.</div> <div><br></div><div>As a result:</div> <div><b></b></div><div><b></b></div><div><b>∙ </b><b>↑X</b> (Relatively cheaper for foreigners), meaning more foreign currency needs to be converted into AUD to pay for these exports, causing an <b>increase in demand</b> for AUD, and</div> <div><b></b></div><div><b>∙ </b>↓M (Relatively more expensive for Australians) , meaning fewer AUD need to be converted into foreign currency to pay for these imports, causing a <b>decrease in supply</b> of AUD.</div> <div> </div> <div>This results in an <b>appreciation</b> of the AUD.</div><div><br></div><div><div><b></b></div><div><b>∙ </b><b>Foreign Investment</b></div> <div><br></div> <div> - Foreign equity investment fluctuates depending on investor’s confidence in Australian shares and the overall state of Australia’s economy. (Perceived risks and returns)<b></b></div> <div>  - <b>↑ </b>Confidence <b>→</b><b>↑ </b>Investment (portfolio or direct) meaning more foreign currency needs to be converted into AUD to pay for these investments, causing an <b>increase in demand</b> for AUD, and</div> <div> - ↓ Confidence <b>→</b>↓ Investment and <b>↑ </b>withdrawal of funds meaning more AUD needs to be converted into foreign currency, causing an <b>increase in supply</b> of AUD.</div> <div><b> </b></div> <div><b></b></div><div><b>∙ </b><b>Credit Ratings and Speculation</b></div> <div><b> </b></div> <div>A low credit rating or a deteriorating credit rating suggests that the government would have a good chance of defaulting on debt, and would reduce the incentive for foreigners to invest in the Australia.</div> <div> </div> <div>Lower Demand for AUD (less incentive to buy AUD)</div> <div>Higher Supply of AUD (more people withdraw their holdings of AUD)</div> <div> </div> <div>Investors also may speculate about future movements in the exchange rate for a range of reasons, and buy and sell Australian dollars to make a profit, which affects the exchange rate.</div> <div> </div> <div> - If investors feel that the AUD is currently <b><i>overvalued </i></b>(speculate that the value of the AUD will fall in the future), they will likely sell the AUD they own now. (To buy more of it in the future and make a profit)</div> <div> </div> <div> - If investors feel that the AUD is currently <b><i>undervalued </i></b>(speculate that the value of the AUD will rise in the future), they will likely buy AUD now.  (To sell it in the future and make a profit)</div> <div> </div> <div>This results in the value of the AUD being somewhat self-fulfilling .</div></div>" "<div>What is the terms of trade, and how do we measure it?</div>""<div><b></b></div><div><b>∙ </b>Terms of trade =  To the ratio of the average prices received for exports relative to the average prices paid for imports.</div> <div> </div> <div><b>∙ </b>Measured by the Terms of Trade Index, which reflects changes in the weighted average prices received for a basket of exports, against changes in the weighted average prices paid for a basket of imports.</div> <div> </div> <div><b>∙ </b>Terms of Trade Index = (Export Price Index/Import Price Index) X 100</div>" <div>What does it mean if the terms of trade increases?</div>"<div><b>∙ </b>Terms of trade increases  =  There must be a rise in the average prices received for Australian exports relative to the price paid for our imports.</div> <div> </div> <div>This means we are can purchase more imports for any given volume of exports.</div>" "<div>Explain the difference between the terms of trade and the Current Account Balance. </div>""<div>The Balance of Trade (BOT) represents two sub-accounts - The Capital and Financial Account and the Current Account. </div> <div> </div> <div>In the Current Account, there are the two sub-accounts of Balance of Merchandise Trade and Net Services (i.e. Balance of Goods and Services) (as well as others - Net Primary and Secondary Income), which represent the difference between the value of Australia's exports to imports of both goods and services. </div> <div> </div> <div>On the other hand, the Terms of Trade (TOT) is an index that measures the average export price to the average import price. </div> <div> </div> <div>The difference between them is that the BOT measures the difference in the value of export and imports and is shown in a dollar figure, whereas the TOT is an index that only compares the prices of exports to imports.</div>" "<div>How would increased construction in China impact the Terms of Trade?<br> <b>Hint:</b> China requires steel for its construction projects, which needs iron ore and coal.</div>""<div>There has been increased construction in China (a Chinese government strategy to stimulate the economy), which has caused an increase in the global demand for mineral commodities (iron ore and coal), which are used to make steel. This has caused global commodity prices to rise. </div>" "<div>How would the Russian-Ukrainian conflict and associated sanctions on Russian commodity exports impact the Terms of Trade?</div>""<div><a>The Russian-Ukrainian conflict & associated sanctions on Russia has interrupted Russian/Ukrainian iron ore and coal production and thus caused a decrease in the global supply of mineral commodities (iron ore and coal). This has caused global commodity prices to rise.</a></div>" "<div>How would the OPEC (Organisation of the Petroleum Exporting Countries) be cutting oil supply by 2  million barrels per day starting from November 2022  impact the Terms of Trade?</div> <div><b>Hint:</b> Australia imports oil</div>""<div>The restriction to global oil supply would generate shortages worldwide (holding the global demand for oil constant). This would therefore increase the prices of oil.</div> <div>Since Australia imports oil, this would increase the import price index, which ceteris paribus would cause a deterioration in the Terms of Trade.</div>" "<div>How would the recovery of Brazilian mining company Vale’s iron ore production impact the Terms of Trade?</div>""<div><b>∙ </b>Rise in supply of iron ore</div> <div><b>∙ </b>Downward pressure on iron ore prices</div> <div><b>∙ </b>Decrease export price index</div> <div><b>∙ </b>Deterioration of Terms of Trade</div>" "<div>What is the definition of international competitiveness?</div>""<div>A country’s ability to compete in global markets for goods and services. Competition can be based on price or non-price factors (E.g. Service or quality). </div> <div> </div> <div>An improvement in our international competitiveness means that Australian firms are either producing goods or services at relatively lower prices or of relatively higher quality compared to goods produced overseas.</div>" "<div>What are the factors that impact Australia’s international competitiveness, and what is required for these factors to increase our international competitiveness?</div>""<div><b>Factor #1 – Productivity </b></div> <div><b> </b></div> <div><b>Productivity = </b>The level of output per unit of input – Total output per unit of input. It is a measure of how efficiently resources are being used to produce goods and services</div> <div> </div> <div><b>Labour productivity</b> – GDP per hour worked</div> <div> </div> <div><b>Capital productivity</b> – Output per machine hour</div> <div> </div> <div><b>Multifactor productivity</b> – Efficiency with which the combined inputs of labour, capital and natural resources are converted into production. </div> <div><b> </b></div> <div>A rise in productivity = more output per unit of input</div> <div><b>∙ </b>Per unit production costs fall</div> <div><b>∙ </b>Businesses can reduce prices and maintain profit margins</div> <div><b>∙ </b>This lowers the relative price of Australian made G + S compared to foreign made G + S </div> <div><b>∙ </b>Australian firms more internationally competitive in terms of price.</div> <div> </div> <div><b>Factor #2 – Costs of Production </b></div><div><img src=""paste-8c84d9984410ebc56a73277e7444abeb32db674d.jpg""><b><br></b></div><div><div><b><br></b></div><div><b>Factor #3 – Availability of Natural Resources</b></div></div><div><b><br></b></div><div><img src=""paste-aa1ae67cb7a1658b7dd44e62b0943b93ee4b52ff.jpg""><b><br></b></div><div><div><b><br></b></div><div><b>Factor #4 - Exchange Rates</b></div></div><div><b><br></b></div><div><img src=""paste-8ebef2246aacbc554f8a2fdf8789f5fdcf212956.jpg""><b><br></b></div><div><br></div><div><div><b>Factor #5 – Relative Rates of Inflation</b></div></div><div><b><br></b></div><div><img src=""paste-5faa9703d85c828b924ba6e3c49809bf6081cdb7.jpg""><b><br></b></div><div><br></div><div><br></div>" "<div>What is the effect of an exchange rate <b>depreciation</b> on aggregate demand, economic growth, the unemployment rate, and living standards?</div>""<div><b>{Demand-Side}</b></div> <div>A effect of an exchange-rate depreciation on:</div> <div> </div> <div><b><u>AD:</u></b> A depreciation of the AUD makes Australian firms in the tradable sector (export and import-competing firms) more <b>internationally competitive </b>in terms of price:</div> <div> </div> <div><b>∙ </b>Export sales overseas will rise because they are now cheaper in foreign currency, and </div> <div><b>∙ </b>Import purchases by Australians will fall because they are now more expensive in AUD.</div> <div> </div> <div>A rise in X and fall in M leads to an increase in AD.</div> <div><b><u><br></u></b></div><div><b><u>S&SEG:</u></b> Firms therefore raise production, causing the short-term cyclical rate of economic growth to rise.<br></div> <div><br></div> <div><b><u>FE:</u></b> With higher production, firms’ derived demand for labour increases, resulting in a decrease in cyclical unemployment.</div> <div><br></div> <div><b><u>LS:</u></b> Since the full-time minimum wage is higher than unemployment benefits, newly employed people are likely to experience a rise in disposable income and therefore have more access to goods and services i.e. material living standard rise.</div>" "<div>What is the effect of an exchange rate <b>depreciation</b> on aggregate supply, economic growth, the unemployment rate and living standards?</div>""<div><b>∙ </b><b><u>AS:</u></b> A depreciation of the AUD makes imported capital more expensive for Australian firms (in AUD). Costs of production therefore rise, lowering profits and making firms less willing and able to produce, causing a decrease in AS and productive capacity.</div> <div> </div> <div>Impact on the goals and living standards:</div> <div> </div> <div><b>∙ </b><b><u>S&SEG:</u></b> A decrease in AS causes shortages and leads to a rise in prices, causing a contraction in AD and a new equilibrium at a higher general price level and lower real GDP i.e. there is a fall in the long-term, sustainable (non-inflationary) rate of economic growth.</div> <div> </div> <div><b>∙ </b><b><u>FE:</u></b> In turn, firms may not require as much labour, increasing unemployment.</div> <div> </div> <div><b>∙ </b><b><u>LS:</u></b> Since unemployment benefits are lower than the full-time minimum wage, newly unemployed people are likely to experience a fall in disposable income and therefore have access to fewer goods and services i.e. material living standard fall.</div>" "<div>What is the effect of an <b>exchange rate depreciation</b> on the goal of low inflation and living standards?</div>""<div>Effect of exchange rate movements on the goal of Low Inflation and LS</div> <div> </div> <div><b>∙ </b>LI: A depreciation of the AUD will increase inflation because:</div> <div> </div> <div>  - With a rise in X, fall in M and increase in AD (explained previously), shortages are more likely to occur, increasing demand inflation,</div> <div>  - With more expensive imported capital for firms, firms need to pass on higher costs of production as higher prices to consumers in order to maintain their profit margins, increasing cost inflation, and</div> <div>  - Some imports are included in the CPI, and a depreciation of the AUD makes them more expensive in AUD, therefore increasing imported inflation.</div> <div> </div> <div><b>∙ </b>LS: With prices rising at a faster rate, inflation is likely to exceed nominal income growth, meaning real incomes will fall i.e. consumers will be able to consume fewer goods and services (causing a fall in material living standards).</div>" "<div>What is the effect of an <b>exchange rate depreciation</b> on the Current Account Balance?</div>""<div><b>Effect of exchange rate movements on the Current Account Balance</b></div> <div><b> </b></div> <div>Australian firms in the tradeable sector will be more internationally competitive in terms of price:</div> <div> </div> <div><b>∙ </b>Export sales overseas will rise because they are now cheaper in foreign currency</div> <div> </div> <div>  - rise in good and services credits</div> <div><br></div> <div><b>∙ </b>Import purchases by Australians will fall because they are now more expensive in AUD</div> <div> </div> <div>  - fall in goods and services debits</div> <div>  - The trade balance will improve i.e. the trade surplus will increase.</div> <div>  - The Current Account balance will improve</div>" "<div>What is the effect of a rise in the Terms of Trade on aggregate demand, economic growth, the unemployment rate,  and living standards?</div>""<div><b>∙ </b>A rise in the terms of trade (most likely due to a <b>rise in global commodity pric</b><b>es</b>) will often <b>spill-over </b>to other parts of the domestic Australian Economy.</div> <div> </div> <div><b>∙ </b>A rise in the terms of trade (most likely due to a <b>rise in global commodity prices</b>) will mean that Australian commodity exporters receive higher prices for any given volume of commodity exports, (due to the relatively inelastic demand for our exports) boosting export income.</div> <div><br></div><div>[This rise in the terms of trade will <u>not</u> directly increase real GDP since the <b>volume</b> of production of commodities has not changed]</div> <div><br></div><div><b>∙ </b>Higher profits for mining companies may lead to increased factor incomes for Australians (such as bonuses or dividends) and/or higher investment by mining firms.</div> <div><b>∙ </b>Therefore, C and I rise, causing an increase in AD.</div> <div><b>∙ </b>With this rise in AD (fuelled by growth in export income flowing through to the rest of the economy) there should be higher economic growth and lower unemployment.</div>" "<div>How does a rise in the Terms of Trade impact the inflation rate?</div>""<div><b>∙ </b>If the terms of trade rise as a result of rising world prices for our exports:</div> <div> </div> <div>  - Growth in export income flows through to the rest of the economy via C & I, and causes an increase in AD and demand inflationary pressure (especially if the economy is near productive capacity).</div> <div>  </div> <div><b>ALSO:</b></div> <div><b>∙ </b>A higher TOT can reduce inflation if it has been driven by a fall in the world prices of our imports because:<br></div> <div> </div> <div>  - If the imports are consumer items included in the CPI, it will reduce the rate of inflation directly.</div> <div>  - If the imports are resources, it will reduce costs of production for firms and prevent cost inflation.] </div>" "<div>How does a rise in the TOT impact the current account?</div>""<div><b>∙ </b>A rise in the TOT means that export prices have risen relative to import prices.</div> <div><b><br></b></div><div><b>∙ </b>We presume that the volume of exports sold and imports purchased is relatively unchanged since Australia’s exports are largely commodities and Australia’s imports are largely capital, both of which have relatively inelastic demand.<br></div> <div><b><br></b></div><div><b>∙ </b>Therefore, the rise in the price of exports relative to imports will result in a rise in the value of Australia’s exports relative to imports.<br></div> <div><b><br></b></div><div><b>∙ </b>This means that goods and services credits will rise relative to debits, and the trade balance will improve, i.e., the trade surplus will increase.<br></div> <div><b><br></b></div><div><b>∙ </b>Therefore, this will result in an improvement in the Current Account balance.</div>" <div>Define Monetary Policy.</div>"<div>An aggregate demand policy implemented by the Reserve Bank of Australia (RBA) on behalf of but independent of the Federal government which involves influencing the cost and demand for credit (primarily via interest rates) in order to achieve its goals.</div>" "<div>What is meant by the RBA’s ‘Charter’, and what does it stipulate?</div>""<img src=""paste-b5a1f586129b8c784def614fed3a274c0e41c887.jpg"">" "<div>‘Aggregate Demand policies are required to stabilise the business cycle’. Justify this statement.</div>""<img src=""paste-74efc3af9272ba06798824128a7af1e5b269e706.jpg"">" <div>What is the short-term money market and the cash rate?</div>"<img src=""paste-67056e05d8f9b2992c2617a7b9d38b675ca15407.jpg"">" <div>What are open market operations?</div>"<img src=""paste-9bf1663fb590a5a7dabe47b6261cd22383aa5ba1.jpg"">" <div>What is the policy interest rate corridor?</div>"<img src=""paste-12b998ab0ea2e3874549958f0fd1ea4a7cb0e5e5.jpg"">" "<div>How does the setting of the policy interest rate corridor encourage banks to borrow and lend ESA balances (i.e., short-term cash) with other banks, rather than the RBA?</div>""<img src=""paste-ba792295c20d978d2475921e44f6c9f1c8f9397b.jpg""><br><img src=""paste-1e445aafb783560f327b3e994a95a673b1ee5b69.jpg"">" "<div>How does the policy interest rate corridor system ensure that the actual cash rate lies somewhere close to the RBA’s target cash rate?</div>""<img src=""paste-c5490cf1c865da82fdb7b2c2cd0c2bd5e9bfa284.jpg"">" "<div>How does the RBA lower interest rates via the interest rate policy corridor?</div>""<img src=""paste-d2172758495801d854a3bc4651027510244c31d6.jpg"">" "<div>If the actual cash rate moved above the target cash rate, how would the RBA use open market operations to ensure that the actual cash rate moved closer toward its target?</div>""<img src=""paste-a9de8aa4cec0fb517ccd091f56467da5dd2675b3.jpg"">" <div>How does the RBA maintain the cash rate?</div>"<img src=""paste-e17be24e0bf88466d4373b848c0dc0428db64556.jpg""><br>" <div>What are unconventional monetary policy tools?</div>"<div>Unconventional monetary policy occurs when tools other than changing a policy interest rate are used to influence aggregate demand in a manner that is consistent with its inflation target and efforts to maintain full employment.</div>" "<div>Name, and describe how the operation of one unconventional monetary tool from the past two years helped the RBA to achieve its objectives.</div>""<img src=""paste-eeeed2b153f6c37d70da57fa546cfd8aec1def98.jpg""><br>" "<div>Describe what is meant by ‘transmission mechanisms’, and list the four channels you have learnt in class.</div>""<img src=""paste-942ca6c095e16823c330bb975d784a06a1228c54.jpg"">" "<div>Explain how a rise in the cash rate would impact Aggregate Demand, via each of the transmission channels.</div>""<img src=""paste-5d85467aaae023f73c66f32c6579f7fe41f88bd7.jpg""><br><img src=""paste-b1387d2e580d84eaa1960d35d0a6b2efff5a70e9.jpg""><br><img src=""paste-9317b9b82be1aac10b679c4fdb42b8b1fdc8c512.jpg""><br><img src=""paste-3d77a221176fba048c744d9fcda51b39fb9f47b3.jpg"">" "<div>What is the key difference between the Cost of Credit Channel and the Cash Flow Channel?</div>""<ol> <li><b>Focus</b>: Cost of Credit is more about the ""accessibility"" and ""cost"" of new credit, while Cash Flow is about the ""affordability"" of existing debt.</li> <li><b>Beneficiaries</b>: The Cost of Credit Channel primarily benefits potential borrowers, whereas the Cash Flow Channel benefits existing borrowers.</li> <li><b>Time Horizon</b>: The effects of the Cost of Credit Channel may take longer to materialise as they depend on new loans and investments. The Cash Flow Channel can have a more immediate impact as it affects existing debt.</li></ol>" "<div>What is the key difference between the Cost of Credit Channel and the Asset Prices and Wealth Channel?</div>""<ol> <li><b>Beneficiaries</b>: The Asset Prices Channel benefits existing asset holders by increasing their net worth. The Cost of Credit Channel benefits potential and existing borrowers by reducing the cost of loans.</li> <li><b>Economic Behaviour</b>: The Asset Prices Channel influences spending and investment through changes in wealth, while the Cost of Credit Channel does so by altering the cost of borrowing.</li> <li><b>Speed of Impact</b>: Asset prices can react almost instantaneously to changes in monetary policy, whereas the effects through the Cost of Credit Channel may take longer to materialise as they depend on new loans and investments.</li></ol>" "<div>What is meant by an expansionary, contractionary, and neutral monetary policy stance?</div>""<div>An expansionary or accommodative monetary policy stance refers to a set of actions taken by the RBA to stimulate economic activity and boost growth (usually cash rate < 3 - 3.5%)</div> <div> </div> <div>A ""neutral"" monetary policy stance refers the RBA’s intention to neither stimulate nor restrict economic growth. In this state, the RBA aims to maintain a balance, keeping interest rates at a level that is consistent with stable inflation, full employment, and sustainable economic growth. (3 - 3.5% cash rate)</div> <div> </div> <div>A ""contractionary"" monetary policy stance refers to a set of actions taken by a central bank to slow down economic growth and curb inflation. (usually cash rate > 3 - 3.5%)</div>" "<div>What is the general rule of thumb for the RBA’s Monetary Policy decision-making?</div>""<img src=""paste-9b96969032a86592c89ffb924da9a2a4c0936a35.jpg""><br><img src=""paste-d324fc9119696bf67a2bc2507093f4efd4ba6846.jpg"">" "<div>What may have caused the cash rate associated with “Monetary Policy Neutrality” to fall over the past  years?</div>""<img src=""paste-0b3f42799d080b4df706d47a7d2eb9c16be9445b.jpg"">" "<div>Explain how it is possible for monetary policy to become relatively more expansionary/accommodative even without a loosening of policy. (in the same sense, explain a tightening of Monetary Policy can still be consistent with an expansionary stance)</div>""<div>It is possible for monetary policy to become relatively more expansionary/accommodative even without a loosening of policy. his can occur if the economy is growing strongly, or indeed overheating, and the RBA does not change the cash rate. In addition, an expansionary policy can still exist even if there is a tightening of monetary policy. For example, when the RBA raised the target cash rate in 2022 from 0.1%  in April to 2.85%  in November, this tightening of monetary policy is not inconsistent with the monetary policy stance remaining expansionary – it simply became less expansionary than before. In other words, the interest rate setting in the economy remained low enough to be stimulating real GDP, despite the tightening of the policy over 2022 .</div>" "<div>Explain how it is possible for monetary policy to remain restrictive/contractionary even without a tightening.</div>""<div>However, it is also possible for monetary policy to become more restrictive even without a tightening of policy. This can occur if economic growth is low, or declining rapidly, and the RBA does not change the cash rate from an already restrictive level (e.g. 4%).</div>" <div>Describe the changes to Monetary Policy actions and stance in 2022.</div>"<img src=""paste-8bd3091db3eb92bb6dd2a99be1609432fc044466.jpg"">" <div>Describe the changes to Monetary Policy actions and stance in 2023.</div>"<img src=""paste-3355d1e3ef198a101a69eaee10117d42000faa41.jpg"">" "<div>Explain why the restrictive Monetary Policy in recent years has assisted in Australia’s achievement of low and stable inflation.</div>""<div><b>∙</b> First, via containment or restrictions in the growth of AD via the five transmission channels referred to earlier.</div> <div><b>∙</b> Second, the higher exchange rate (which typically results from higher interest rates) will reduce the prices of imported consumer goods and immediately decrease pressure on the CPI. In addition, there should be a fall in the prices of producer imports (such as imported roboticsor machinery) which assist in containing the CPI over the medium-term once the lower costs of production are passed onto consumers.</div> <div><b>∙</b> Third, the policy tightening helps to contain inflationary expectations.</div>" "<div>Explain how the current restrictive stance of Monetary policy is likely to affect the domestic macroeconomic goals and living standards.</div>""<div><b>‘… persistently high inflation is corrosive and damages our economy. It erodes the value of savings, puts pressure on household budgets and hurts people on low incomes the most. High inflation makes it harder for businesses to plan and it distorts investment. And if inflation becomes ingrained in expectations, it requires even higher interest rates and a larger increase in unemployment to get it back down again.’ – Phillip Lower 2022</b><b> (Natiional Press Club)</b></div> <div> </div> <div>The current restrictive stance of monetary policy is likely to return inflation back into the target range over 2024 -25 - the RBA expects inflation to be 4.5%  in 2023  and 3%  by mid-2025. While the reduction in inflation that stems from the current restrictive monetary policy stance does come at the expense of growth in AD and economic growth (forecast to slow to between 1%  to 2%  over the next two years), it is expected to reduce pressure in labour markets by decreasing the demand for labour relative to supply. The unemployment rate is forecast to increase from</div> <div>its current low level of 3.5%  to approximately 4.5%  (by June 2025 ).</div>" <div>Define Budgetary Policy.</div>"<div>Budgetary Policy refers to the government's manipulation of the level and composition of its revenue and  expenses (i.e. government spending and taxation) in order to achieve its economic goals.<br> <br> </div> <div>Internal Stability (Economic Growth, Low inflation and Full Employment)</div> <div>Greater equity in the distribution and wealth</div> <div>External Stability</div> <div>Improvement in overall living standards.</div>" "<div>What are the main sources of government revenue, and their relative importance to the composition of overall government revenue? Give some examples.</div>""<img src=""paste-79b613b19273d3e732695eade9350f03c3d1fc4a.jpg""><br><div><b>Direct taxes (About 69% </b><b>of revenue)</b> – a direct tax is defined as one that is paid directly by economic agents and it usually varies with income earned. (e.g., personal income, company)</div> <div><b> </b></div> <div><b>Indirect taxes (About 22%</b><b> of total revenue) – </b>Taxes that are levied on the purchases made by economic agents.  (e.g., capital gains tax, medicare levy)</div> <div>They don’t increase based on the income earned by the person and are therefore seen as regressive because low-income earners pay a greater percentage of their income in excise than a higher income earner.</div> <div> </div> <div><b>Non-taxation revenue (Not very important)</b></div> <div>         i.Dividends on Government owned enterprises</div> <div>       ii.Money from HECS repayments </div> <div>     iii.Profits from Government Business Enterprises (such as Australia Post)</div>" <div>What is the key difference between direct and indirect taxes?</div>"<div><b>∙ </b>direct taxes cannot be shifted onto another party, unlike indirect taxes which are passed on to consumers via higher prices.</div> <div><b>∙ </b>Indirect taxes do not necessarily rise with levels of income</div>" "<div>Define proportional, regressive and progressive taxes, give examples of each and briefly explain their nature/consequences.</div>""<div><b>∙</b> <b>A progressive tax is one where higher income earners pay a higher percentage rate of tax compared to lower income earners. This means that a higher proportion of their income is taxed compared to lower income earners. It is designed so that higher income earners are taxed more heavily (or proportionally more) than low income earners, so that the overwhelming tax burden falls upon those with a greater capacity to pay.</b></div> <div> </div> <div><b>∙</b> Proportional taxes on income are those where the ‘rate of tax’ stays the same regardless of how much income is earned, resulting in income earners paying the same proportion of their income in tax. For example, if all Australian individual income earners paid a flat rate of 25% tax (or 25 cents for every dollar earned) then all individual taxpayers would be paying the same ‘proportion’ of their income in tax.</div> <div> </div> <div><b>∙</b> Regressive taxes are those that result in the proportion of income paid in tax rising as income falls (or the proportion paid in tax falling as income rises). Most indirect taxes are regressive in nature given that the taxed portion of a good or service will represent a higher proportion of a lower income earner’s income, compared to higher income earners. Indirect taxes (excise) on alcohol, tobacco and fuel are regressive because they impose a greater burden on lower income earners.</div>" "<div>What are the main types of government expenditure? What is the largest form of government expenditure as a share of total expenditure? Give some examples.</div>""<img src=""paste-6ee9dfb66873963b95c9a17c69c60cb17b982346.jpg""><br><img src=""paste-f7c23e9386769d75a3252c69150dc54a69a6aae9.jpg"">" "<div>What are the different budget outcomes? How might a change in revenue and/or expenditure impact the budget outcome?</div>""<img src=""paste-dbe4b9c0fb2ccec22551bbeb290da797a7c95ce5.jpg"">" <div>What is the headline cash balance?</div>"<div>Total cash received by the government less total cash paid (can often be misleading because it includes receipts and expenditure that does not directly impact the economy).</div>" <div>What is the underlying cash balance?</div>"<div>The underlying cash balance is the most common budget outcome referred to by the government and the press. It is derived from the original cash receipts and payments of the government, but adjusted to remove the effects of ‘net cash flows from investments in financial assets for policy purposes’, i.e., the underlying outcome removes the effects of transactions that are either one-off or do not affect the budget balance in net terms over time.</div>" "<div>How do we relate the underlying cash balance to the headline cash balance in terms of their calculation?</div>""<div>The underlying cash balance is the most common budget outcome referred to by the government and the press. It is derived from the original cash receipts and payments of the government, but adjusted to remove the effects of ‘net cash flows from investments in financial assets for policy purposes’, i.e., the underlying outcome removes the effects of transactions that are either one-off or do not affect the budget balance in net terms over time.</div>" "<div>How do we relate the underlying cash balance to the headline cash balance in terms of their calculation?</div>""<img src=""paste-c5deeab350f1dff118d30389459ef05da6d3471d.jpg"">" "<div>What is the forecast budget outcome for the 2023-24 financial year? Explain why the actual budget outcome will be different to the forecast budget outcome.</div>""<div><b>∙</b> For example, the 2023 -24 Budget delivered in May 2023  reported an estimated underlying budget deficit of $13.9 B  ( 0.5% of GDP) for the financial year 2023 -24. However, this refers to the estimated outcome for the next financial year – ending on the 30  June 2024 .</div> <div><b>∙</b> The actual outcome for 2023 -24 will not be known until later in 2024  (typically September). It is important to note that the actual outcome is invariably quite different to the estimated outcome because the latter depends heavily on the accuracy of a range of economic forecasts for key variables, such as growth in nominal and real GDP, wages growth, inflation, the rate of unemployment and key commodity prices like iron ore (which influence Australia’s terms of trade and company profits). If the outcome for these variables is different to the forecasts, then the actual budget outcome will deviate from the estimated budget outcome.</div>" "<div>Consider the key forecasts upon which the current Budget Figures are based.</div><div><img src=""paste-fc7d7683f0234fe8744718b3b252377397dec55a.jpg""><br></div><div><div>Fill in the table below.</div></div><div><img src=""paste-62e596ad9c2d551201434462a7da6cd03cc14667.jpg""><br></div><div><div>Data are annual average percentage growth, except where specified other ise.</div></div>""<img src=""paste-e17c345f4f4afdd6391fc2959e43fcb1f6ee48f2.jpg"">" "<div>Describe the different methods of financing a budget deficit, and briefly discuss their effects/consequences.</div>""<div><b>Selling bonds to the RBA</b></div> <div>This is most expansionary (and most inflationary) as money that was previously not in the money supply is now released into circulation. This type of financing has become rare since the late 1980's  because the government and the RBA were keen to have a clear separation of monetary and budgetary policies. This point was reiterated by the RBA Governor in 2020  when he clarified that the RBA’s purchasing of AGS on ‘secondary markets’ (i.e. not directly from the federal government) during 2020 was an attempt to support budgetary policy efforts to stimulate the economy rather than an example of the RBA funding budget deficit(s).</div> <div><b> </b></div> <div><b>Selling bonds to Australian investors (lenders)</b></div> <div><b> </b></div> <div>This is least expansionary because domestic bond sales place upward pressure on interest rates (because the demand for ‘money’ increases, which lifts the price of ‘money’). These higher interest rates result in a crowding out of the private sector as consumers and businesses reduce Consumption and Investment. In addition, the higher interest rates force some local borrowers (e.g. corporations) to borrow from overseas lenders, resulting in capital inflow and a higher exchange rate. This contributes to crowding out of Australia’s tradables sector, where exporters and import competing businesses lose market share. The effect of crowding out constrains AD over time and reduces the expansionary impact of a budget deficit. This type of financing is the most common.</div> <div><b> </b></div> <div><b>Selling bonds to overseas investors (lenders)</b></div> <div>This results in capital inflow that exerts upward pressure on the value of the AUD, which in turn has a negative impact on net exports and AD. This reduces the expansionary impact of a budget deficit and relates to the point made earlier with respect to the contractionary nature of budget deficits. The degree to which Treasury issues bonds or notes in overseas markets depends on the state of financial markets and the confidence foreigners have in Australian ‘sovereign debt’.</div>" "<div>What are the different ways in which the government can utilise a budget surplus?</div>""<img src=""paste-512a04ed8b4e93af6d3cfb09fc3caa1c9a2a3902.jpg""><br><img src=""paste-310ce82d5016d7c1597ec341ce600bfe5b910a74.jpg""><br><img src=""paste-6e7497adaefadfd37589677dbce49df02ac853cc.jpg""><br><img src=""paste-432d1a5e07e1b093b47315e4dcca26b0c0af4f4f.jpg""><br><img src=""paste-e219a1ab84e48a01126c738c12b6e0cceda97899.jpg""><br><img src=""paste-00c32f74d3b3ec25844494a5ecf23e0e53210506.jpg"">" "<div>Outline how a budget surplus might have a positive influence on future rates of economic growth.</div>""<img src=""paste-421f97d642165512642ae6ff4f8abfd8d7dd8539.jpg"">" "<div>What is the difference between ‘gross’ government debt, and ‘net’ government debt?</div>""<div>Gross government debt refers to the total amount of money that a government owes to external and internal creditors.</div> <div> </div> <div>Net government debt is the gross debt minus certain financial assets that the government holds, such as cash reserves, stocks, and bonds.</div> <div> </div> <div>Scope: Gross debt is a broader measure that includes all liabilities, while net debt is a narrower measure that accounts for financial assets.</div> <div> </div> <div>Implications for Policy: Gross debt can be more alarming but may not reflect the government's actual fiscal position. Net debt is often considered a more accurate indicator for policy decisions.</div>" "<div>What is the difference between (net) government debt and (net) foreign debt?</div>""<div>Net foreign debt refers to the total amount of money that residents, businesses, and the government of a country owe to foreign creditors, minus the foreign debt that is owed to them.</div> <div> </div> <div>Scope of Debt: Net government debt is limited to the government's financial obligations, while net foreign debt includes obligations from all sectors of the economy to foreign entities.</div> <div> </div> <div>Creditor Base: Net government debt can be owed to both domestic and foreign creditors, whereas net foreign debt is strictly related to foreign creditors.</div> <div> </div> <div>Asset Consideration: Both net measures account for financial assets, but net foreign debt also considers the foreign assets owned by the country's residents and businesses.</div>" "<div>What is the relationship between the budget outcome and the level of government (public) debt? What is one consequence of high levels of government debt?</div>""<div>It should be clear from reading the previous sections that budget deficits will require funding in the form of debt (or the sale government equity over time) and budget surpluses will facilitate the repayment of government debt. Accordingly, continuing budget deficits over time will add to government debt which requires the repayment of both interest and principal into the future. This debt is recorded as a liability on the government’s balance sheet and is generally considered to worsen the government’s financial position in the sense that it makes the government less able to respond to economic shocks in the future.</div>" "<div>Define the term ‘automatic stabilisers’. Also, explain why they are referred to as the ‘cyclical components of the budget’.</div>""<div>Built-in aspects of the budget that change in response to economic conditions in a counter-cyclical way without any deliberate action by the government.</div> <div> </div> <div>They are called cyclical components of the budget because</div><div><br></div><div><img src=""paste-fffe195afbf89f6cf72380d79396c923086d4dcf.jpg""><br></div>" "<div>Explain how automatic stabilisers operate to stabilise the business cycle during peaks/rising economic activity.</div>""<img src=""paste-99251041fc387e796346fe313dccacede91b1ef9.jpg"">" "<div>Explain how automatic stabilisers impact the economy during troughs/falling economic activity.</div>""<img src=""paste-3a9373ed8f4da31f2bdda39dad683f55efd3a90f.jpg"">" "<div>Define the term ‘discretionary stabilisers’, and explain why they refer to the ‘structural component of the budget’.</div>""<div>· Any time the federal government decides to change the way it collects money or makes payments (composition of receipts/payments) or adjust</div> <div>· the volume of its receipts/payments (level of receipts/payments) it will typically impact on the size of the budget outcome (e.g. increase or</div> <div>· decrease the surplus/deficit). This change in the budget outcome reflects a deliberate attempt (i.e. an actual policy decision) to use the budget</div> <div>· to change the allocation of resources or assist with the achievement of its goals. In this respect, the actual ‘structure’ of the budget is deliberately</div> <div>· altered by the government. This represents the structural component of the budget and changes of this nature are sometimes referred to as discretionary stabilisers.</div>" "<div>Explain the role of discretionary stabilisers in influencing Aggregate Demand and stabilising the business cycle.</div>""<div><b>During a trough</b></div><div><img src=""paste-c86e021bddd18d48bd938282ccbc823c8129706d.jpg""><br></div><div><div><b>During a peak</b></div></div><div><img src=""paste-66401621563a55e09b95f8d21ded0e6b9fe08a43.jpg""><b><br></b></div>" "<div>Explain how automatic stabilisers can impact the budget outcome during a trough or falling economic activity and during a peak or rising economic activity.</div>""<img src=""paste-2d7d94bf1007853656e2e05d617dbe06446960fd.jpg"">" "<div>Explain how discretionary stabilisers can impact the budget outcome during a trough or falling economic activity and during a peak or rising economic activity.</div>""<img src=""paste-e2e94574ebc65f646017bb2784632e4f65801607.jpg""><img src=""paste-3e2b2a7fb4f9dbb8a03606f7a306409e2e55e3fd.jpg"">" <div>What is meant by the ‘stance’ of budgetary policy?</div>"<div>The stance of budgetary policy refers to the approach a government takes in managing its revenues and expenditures in order to have some intended impact on the economy.</div> <div> </div> <div>· Expansionary (or Loose) Budgetary Policy: In this stance, the government increases spending and/or reduces taxes to stimulate economic growth. This is often used during economic downturns to boost demand and create jobs.</div> <div> </div> <div>· Contractionary (or Tight) Budgetary Policy: Here, the government reduces spending and/or increases taxes to slow down the economy. This is usually implemented to control inflation or reduce public debt.</div> <div> </div> <div>· Neutral Budgetary Policy: In a neutral stance, the government aims for a balanced budget where revenues match expenditures. This is often the goal during periods of economic stability.</div>" "<div>Fill in the table below, which summarises the general ‘rule of thumb’ for determining the budgetary policy stance.</div><div><img src=""paste-faa28ef23b4361dec0638c6a2244a2498c709524.jpg""><br></div>""<img src=""paste-d5de16e12a71015766aedd4f5f11e57e92762c1b.jpg"">" <div>How may a budget deficit still be considered contractionary?</div>"<div>A movement in the budget outcome from a large deficit one year to a smaller deficit the next year could be evidence of a contractionary stance, particularly if the change in the budget outcome has occurred for structural rather than cyclical reasons. While a deficit would still exist in the second year, its smaller size may have been due to an increase in tax rates and/or a decrease in discretionary spending that will have a contractionary effect on the economy.</div>" <div>How may a budget surplus still be considered expansionary?</div>"<div>While the 2022 - 23 budget outcome is expected to improve significantly, with an expected return to surplus this year. On the face of it, it appears to be a less expansionary or contractionary budget because receipts are rising relative to payments (e.g. leakages from the economy rising relative to injections). However, it is really a more expansionary budget because part of the cyclical improvements to the budget were spent via expansionary discretionary initiatives. This highlights the need to examine the changing composition or structure of the budget before determining whether it is expansionary or contractionary</div><div><img src=""paste-fc77c9cca26ee458473c9facb48ee3ab122608cd.jpg""><br></div>" <div>What is the economic rationale for ‘fiscal consolidation’?</div>"<img src=""paste-3912b69258ca74f490fed46657b21adbe3bbd2a9.jpg"">" "<div>Describe the stance of budgetary policy for the 2023 - 24 financial year. Refer to relevant figures in your response.</div>""<div>The current 2023 - 24 Budget sees the budget outcome move from an actual budget surplus of $22.1 B for 2022 - 23 to an estimated budget. deficit of $13.9 B for 2023 - 24. A larger deficit implies a more expansionary budgetary stance, as the government’s contribution to AD (or the net fiscal stimulus to AD) increases. This is particularly the case given that there are further cyclical improvements to the 2023 - 24 budget figures (flowing from continued strength in commodity prices and a tight labour market) that have not all flowed through to the overall outcome.</div>" "<div>Describe the stance of budgetary policy for the 2022 - 24 financial year. Refer to relevant figures in your response.</div>""<div>The 2022 - 23 Budgets appears, on the face of it, to be less expansionary (or even contractionary) given the movement from a deficit in 2021/22  to a surplus of $22</div><div> 1 billion in 2022/23. However, these improvements to the budget outcome occurred primarily as a result of improvements in cyclical components of the budget (huge growth in commodity prices and the better than expected employment outcomes) resulted in an automatic increase in receipts relative to expenditure. However, the Government spent some of these gains via discretionary stabilisers, which resulted in the structural component of the budget being a deficit, hence the stance is expansionary.</div>" "<div>List some ‘policies from the  budget that aimed to stimulate the economy/maintain recovering levels of economic activity.</div>""<img src=""paste-a4e839f65d6f5f021a246f0ac5b1c757905f2e0c.jpg""><br><img src=""paste-f307cafee43ed4c1973a6529872f9f37e1ef7009.jpg"">" "<div>Identify one policy from the 2022 - 23 budget that directly aims to address structural unemployment.</div>""<div>· A Skills and Training Boost for small businesses via a 120%  tax deduction on the cost of external training courses</div> <div> </div> <div>· A further investment of $2.8  billion over five years to upskill apprentices (including the development of the new Australian Apprenticeships Incentive Scheme).</div>" "<div>List some ‘policies from the 2023-24 budget that aim to stimulate the economy/address cost of living pressures for businesses and households.</div>""<div>· Delivering up to $3  billion of electricity bill relief for eligible households and small businesses. From July 2023 , this plan will deliver upto $500  in electricity bill relief for eligible households and up to $650  for eligible small businesses.</div> <div> </div> <div>· Increasing the base rate of payments by $40 per fortnight for those in receipt of income support payments such as JobSeeker, Payment, Austudy and Youth Allowance. Payments to many eligible Jobseeker recipients over the age of 55  will receive an increase in their base rate of payment of $92.10  per fortnight</div> <div> </div> <div>· The provision of $290 million in cash flow support through the $20,000  instant asset write-off provision (which is an accelerated depreciation allowance) which should incentivize small businesses to invest in new capital and equipment.</div>" "<div>List some policies from the 2023 - 24 budget that helps to ‘consolidate’ or ‘strengthen’ the budget outcome.</div>""<div>· Reducing superannuation earnings tax concessions for those with superannuation balances exceeding $3 million.</div> <div> </div> <div>· Increasing the effective tax paid by large gas energy producers (by $2.4  billion over the 5  years from 2022 - 23 ) via reform to the petroleum Resource Rent Tax to ensure a fairer return to the Australian community.</div> <div> </div> <div>· Increasing tobacco excise by 5% each year for 3  years from 1  September 2023  and aligning the treatment of stick and non stick tobacco tax.</div> <div> </div> <div>· Taxing multinationals more via the introduction of a global minimum tax ( 15% ) and a domestic minimum tax to ensure that large multinational enterprises pay a minimum level of tax in the jurisdictions in which they operate.</div> <div> </div>" <div>Define ‘aggregate supply policies’.</div>"<div>""Policies designed to create more favourable conditions for firms, so that they become more willing/able to produce, causing an increase in AS and productive capacity.""</div>" "<div>Distinguish ‘aggregate supply policies’ from ‘aggregate demand policies’. </div>""<div>Aggregate demand policies are policies that are implemented in order to regulate aggregate demand in a counter-cyclical way (i.e., designed to boost aggregate demand during periods of weak spending and economic growth and slow aggregate demand during periods of high inflation and unsustainable economic growth). </div> <div> </div> <div>Aggregate Supply policies are policies designed to create favourable conditions for firms so that they are more willing and/or able to produce, causing an increase in Aggregate Supply and productive capacity.</div> <div> </div> <div>The difference between the two is that the main goal of AD policies is to stabilise the business cycle at its extremities, while the main aims of AS policies are to improve long-term rates of economic growth and reduce the costs at which firms output goods and services.</div>" "<div>Draw diagrams demonstrating the different impacts of AS and AD policies.</div>""<img src=""paste-7f1a0a8d3b0a0af837396f2f49a7295c6394b893.jpg""><br><img src=""paste-a6aeb8b0c2a754dec086c0d60234a684de62e449.jpg""><br><img src=""paste-4d0f8a7fa267672cdf677638fbc2a514495c7852.jpg""><br><img src=""paste-562cba4e349c7f1aba1d2aea31821f79c6cd8980.jpg"">" "<div>Define ‘aggregate supply’ and ‘productive capacity’.</div>""<div>Aggregate Supply: The total volume of goods and services produced in Australia over a period of time (year).</div> <div>Productive Capacity: The economy's physical limit to produce goods and services when all resources are used to maximum efficiency.</div>" "<div>Define ‘productivity’, ‘labour productivity’, and 'productivity growth'.</div>""<div>Productivity: The level of output per unit of input of resources. </div> <div>E.g., labour productivity is the value of output produced per worker per hour.</div> <div>Productivity growth means a greater volume of goods and services can be produced from the same level of inputs.</div>" "<div>Outline the aims of aggregate supply policies:</div>""<div><b>∙ </b><b><u>To increase the long-term sustainable (non-inflationary) rate of economic growth:</u></b> by creating more favourable conditions for firms (e.g., by lowering production costs), so that firms become more willing/able to produce, causing an increase in AS and productive capacity, therefore allowing higher levels of production without inflation.</div> <div> </div> <div><b>∙ </b><b><u>To reduce cost inflation:</u></b> by helping to lower the costs of production for firms, therefore allowing firms to lower prices while maintaining profit margins.</div> <div> </div> <div><b>∙ </b><b><u>To improve firms’ international competitiveness:</u></b> by reducing production costs and therefore prices in Australia, reducing the relative price of Australian-made goods/services compared to foreign-made goods/services, thus improving Australian firms’ international competitiveness in terms of price.</div> <div> </div> <div><b>∙ </b><b><u>To address short-term supply shocks:</u></b> to mitigate the decline in AS and production that occurs due to short-term supply shocks such as drought, bushfires, COVID-19, or wars.</div>" "<div>Distinguish interventionist from market-based AS policies.</div>""<div>Interventionist policies are initiatives that would not occur, or would occur at a sub-optimal level, without government intervention. They involve government interference in markets to increase efficiency and AS.</div> <div> </div> <div>Market-based policies involve the withdrawal of government intervention in the economy, which exposes businesses and individuals to more competitive pressure, which in turn creates additional incentives to increase efficiency. They rely on the power of markets to increase efficiency and AS. </div> <div> </div> <div>A key difference between the two is that interventionist policies almost always require some level of government outlay (e.g., subsidies require government transfer payments to the private sector), whereas market-based policies generally involve the changing of some government revenue-earning avenue (e.g., personal income tax reform).</div>" "<div>How do Aggregate Supply policies complement Aggregate Demand policies in promoting non-inflationary economic growth over time?</div>""<div><b>∙ </b><b>AD policies promote stability:</b> Stability: When aggregate demand policies are used to manage short-term fluctuations, they can help stabilise the economy and prevent severe recessions. This stability provides a favourable environment for businesses to invest and grow, contributing to long-term economic growth.</div> <div><b><br></b></div><div><b>∙ </b><b>AS policies promote sustainable growth:</b> Aggregate supply policies, focused on improving productivity and capacity, contribute to sustained economic growth over time. As the economy's productive capacity expands, it becomes better equipped to meet increasing demand without triggering excessive inflation.<br></div> <div><b><br></b></div><div><b>∙ </b><b>AS policies help to curb inflation:</b> Coordinated aggregate supply and demand policies can help control inflation. If demand starts to outstrip supply, causing inflationary pressures, an emphasis on supply-side policies can increase productive capacity and help ease inflationary pressures.</div> <div><b><br></b></div><div><b>∙ </b><b>Impact on employment:</b> Both types of policies can impact employment. While aggregate demand policies can stimulate job creation in the short term, aggregate supply policies that improve productivity can lead to higher sustainable employment levels over the long term.</div> <div><b><br></b></div><div><b>∙ </b><b>Balanced Approach:</b> A balanced approach that combines well-timed aggregate demand and supply policies can create a virtuous cycle. Increased demand from demand-side policies can encourage businesses to invest, expand, and hire, leading to higher production and supply in the long run.</div>" "<div>Explain the impact of a rise/fall in aggregate supply on economic growth using precise language.</div>""<div><b>A rise in Aggregate Supply</b><br> [Favourable supply factor, define if necessary] → Increase in AS (explain why there is a rise in AS with reference to firms’ willingness and ability to produce)</div> <div>→ <i>“</i><i>This results in surpluses, putting downward pressure on prices, leading to an expansion in AD and a new equilibrium at a higher output (GDP) and lower general price level, i.e., a rise in the sustainable (non-inflationary) rate of economic growth.”</i></div> <div> </div> <div><b>A fall in Aggregate Supply </b></div> <div>[Unfavourable supply factor, define if necessary] → Decrease in AS (explain why there is a rise in AS with reference to firms’ willingness and ability to produce)</div> <div>→ <i>“</i><i>This results in shortages, putting upward pressure on prices, leading to a contraction in AD and a new equilibrium at a lower output (GDP) and higher general price level, i.e., a fall in the sustainable (non-inflationary) rate of economic growth</i><i>”</i></div>" "<div>Explain the impact of a rise/fall in aggregate supply on unemployment using precise language.</div>""<div><b>A rise in Aggregate Supply</b><br> [Favourable supply factor, define if necessary] → Increase in AS (explain why there is a rise in AS with reference to firms’ willingness and ability to produce).</div> <div>→ <i>“</i><i>This results in surpluses, putting downward pressure on prices, leading to an expansion in AD and a new equilibrium at a higher output (GDP) and lower general price level, i.e., a rise in the sustainable (non-inflationary) rate of economic growth.”</i></div> <div>→ <i>“</i><i>This in turn causes supply-side employment growth, causing the level of unemployment to fall.</i><i>”</i></div> <div><i> </i></div> <div><b>A fall in Aggregate Supply </b></div> <div>[Unfavourable supply factor, define if necessary] → Decrease in AS (explain why there is a rise in AS with reference to firms’ willingness and ability to produce).</div> <div>→ <i>“</i><i>This results in shortages, putting upward pressure on prices, leading to a contraction in AD and a new equilibrium at a lower output (GDP) and higher general price level, i.e., a fall in the sustainable (non-inflationary) rate of economic growth.</i><i>”</i></div> <div>→ <i>“</i><i>This in turn lowers supply-side employment growth, causing the level of unemployment to rise.”</i><i></i></div>" "<div>Explain the impact of a rise/fall in aggregate supply on inflation using precise language.</div>""<div><b>A rise in Aggregate Supply</b><br> [Favourable supply factor, define if necessary] → Associated lower costs of production, and hence lower per unit costs of production (define the specific cost of production)</div> <div>  → <i>“</i><i>Therefore, firms do not need to charge consumers higher prices to maintain profit margins, meaning cost inflation is avoided”</i><i></i></div> <div> </div> <div><b>A fall in Aggregate Supply </b></div> <div>[Unfavourable supply factor, define if necessary] → Associated higher costs of production, and hence higher per unit costs of production (define the specific cost of production)</div> <div>  → <i>“</i><i>Therefore, firms must pass on higher costs to consumers as higher prices to maintain profit margins, causing a rise in the level of cost inflation”</i><i></i></div>" "<div>Explain the impact of a rise/fall in aggregate supply on international competitiveness.</div>""<div>Aggregate supply policies can improve Australia's international competitiveness by enhancing its productive capacity and efficiency. These policies boost Australia’s productive capacity by reducing production costs, increasing access to resources, and/or boosting productivity. This allows for the output of more goods and services at a lower general price level, which would tend to boost Australia’s international competitiveness in terms of price as it reduces the relative price of Australian g/s compared to foreign g/s.</div>" <div>Define ‘efficient allocation of resources’.</div>"<div><b><i>An efficient allocation of resources:</i></b><i></i></div> <div><i>An efficient allocation of resources is when scarce resources are allocated in a way such that the satisfaction of society's wants and needs is maximised, opportunity cost will be minimised and no alternative allocation of resources can improve overall social welfare, and the four types of efficiency are at their maximums.</i></div>" <div>Define: </div><div><b>∙ </b>Allocative Efficiency<br></div><div><b>∙ </b>Productive/Technical Efficiency<b><br></b></div><div><b>∙ </b>Dynamic Efficiency<b><br></b></div><div><b>∙ </b>Inter-Temporal Efficiency<br></div>"<div><b>∙ </b>Allocative Efficiency<br></div><div><div>The allocation of resources such that the satisfaction of society's wants and needs is maximised. (i.e., producing the right goods and services at the right amounts)</div></div><div><br></div><div><b>∙ </b>Productive/Technical Efficiency<b><br></b></div><div><div>The allocation of resources such that outputs per unit input are maximised (i.e., producing goods and services in the right way).</div></div><div><br></div><div><b>∙ </b>Dynamic Efficiency<b><br></b></div><div><div>How quickly an economy can reallocate resources to achieve allocative efficiency in response to changing economic conditions.</div></div><div><br></div><div><b>∙ </b>Inter-Temporal Efficiency</div><div><div>The allocation of resources such that future generations are able to enjoy the same level of consumption and satisfaction as current generations. </div> <div>Balancing the allocation of resources between the present and the future.</div></div>" "<div>Explain how aggregate supply policies can help to improve different types of efficiency:</div><div><div><b>∙ </b>Productive/Technical Efficiency<br></div><div><b>∙ </b>Allocative Efficiency<b><br></b></div><div><b>∙ </b>Dynamic Efficiency</div></div>""<div><b>∙ </b>Productive/Technical Efficiency<br></div><div><div>[LINK AS POLICY to Productivity, e.g., R&D, Education and Training, Immigration Policy] → <i>“This means that firms have improved the level of their output per unit input (i.e., production costs have been lowered to their possible minimums), therefore improving productive capacity.”</i></div></div><div><br></div><div><b>∙ </b>Allocative Efficiency<b><br></b></div><div><div>[LINK AS POLICY to Productivity, e.g., R&D, Education and Training, Immigration Policy] → <i>“This means that firms have improved the level of their output per unit input (i.e., production costs have been lowered to their possible minimums), therefore improving productive capacity.</i></div> <div><i>Since the economy is maximising its outputs per unit input, it is more able to satisfy more wants and needs of the economy, thereby increasing allocative efficiency as well as technical efficiency.”</i></div></div><div><br></div><div><b>∙ </b>Dynamic Efficiency</div><div><div>Additionally, improvements in productivity may allow firms to more quickly reallocate resources to achieve allocative efficiency. This may be illustrated through infrastructure spending on the Melbourne Intermodal Terminal, as when economic conditions change, firms may utilise the shorter travel times and effective transit to alter production to satisfy a change in economic conditions, thereby improving dynamic efficiency.</div></div>" "<div>Explain how lifting efficiency (focusing on productive/technical efficiency) impacts aggregate supply.</div>""<div>An improvement in technical efficiency means that productivity (output per unit input of resources) will increase, leading to lower per-unit production costs for businesses. This would cause the firm’s profitability to rise, making them more willing and able to supply a greater volume of goods and services than before. As a result, productive capacity and aggregate supply rise.</div>" "<div>Describe an example of a training/education policy (JobTrainer).</div>""<div>The JobTrainer Fund was launched in 2020. It provides jobseekers access to free or low-fee training places in areas of skills shortages.</div> <div>In the 2021 - 22  budget, it was announced that JobTrainer will be extended to the end of 2022  with an extra $1  billion committed.</div>" "<div>Explain (via its supply-side impact) how spending on training and education can:</div><div><div><b>∙ </b>Increase economic growth</div></div><div><b>∙ </b>Lower unemployment<br></div><div><b>∙ </b>Lower inflation</div>""<div><div><b>∙ </b>Increase economic growth</div></div><div><div>Spending on training and education is likely to improve the quality of a worker's experience, skills, intelligence and hence the quality of human capital. An improvement in the quality of human capital would lead to a rise in labour productivity (i.e., a rise in the level of output per worker per hour) which would lead to a fall in the per-unit costs of production for firms. As a result, firms have increased profitability become more willing and able to supply, increasing Aggregate Supply and productive capacity.</div> <div> </div> <div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary economic growth to rise, assisting in the achievement of strong and sustainable economic growth.</div></div><div><br></div><div><b>∙ </b>Lower unemployment<br></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth.</div> <div>In addition, due to the higher levels of production, firms' derived demand for labour also increases, causing a fall in the level of unemployment. The generation of supply-side growth assists in the achievement of the goal of full employment.</div></div><div><br></div><div><b>∙ </b>Lower inflation</div><div><div>An increase in AS indicates that firms have lower costs of production, which can be passed on to consumers while maintaining profit margins, causing downward pressure on price levels, and decreasing cost inflation. This makes economic and employment growth more sustainable in the long term, assisting in the achievement of price stability.</div></div>" "<div>Explain how spending on training and education might reduce the incidence of structural unemployment and long-term unemployment.</div>""<div>Education and training improve the dynamic efficiency of labour markets by better equipping members of the labour force with a diverse range of skills and knowledge in order to ensure that the quality of the supply of labour better meets the demands of businesses and employers. </div> <div>As a result, this reduces the incidence of structural unemployment (as the skills of the labour force are more closely matches with the requirements of the economy) and it reduces the duration of unemployment for people who lose their jobs in changing economic conditions. </div>" "<div>Define ‘research’ and ‘development’, and ‘research and development grant’.</div>""<div><b>Research</b> describes the exploration of new concepts (new ideas) in relation to methods of production, new products or improvements to product ranges.</div> <div><b>Development</b> builds upon research to add value to the production process and implementing these new methods of production, improvements to existing product ranges and/or building new products altogether.</div> <div>A <b>research and development grant</b> refers to the financial support provided by the government to firms to reduce the costs associated with undertaking research and development, making it inherently less risky for firms (as they are risking less funds to undertake the research).</div>" <div>Explain why R&D is risky for firms </div>"<div><b>Research and Development is risky for firms</b> <b>because</b> there is no guarantee that the research will result in any economic benefit. I.e., there is no guarantee that millions of dollars of research will result in any concrete benefit for the business in terms of new/better products or methods of production. Therefore, some of the investment in R&D will fail to generate an economic return for the business. Additionally, there is a possibility that competing firms may be able to leech off the company's Research and Development without undergoing any expenditure but reaping the benefits. I.e., they will 'piggyback' off the R&D success without contributing any expenditure in the process.</div>" "<div>Explain why there is an under-allocation of resources to R&D in the free market.</div>""<div>Research and Development has a positive externality in production as it provides benefits to third parties (not the buyer or sellers of R&D). The benefits include the potential for developing more efficient production processes that will result in lower prices overall for consumers, improving their access to goods and services and hence their material living standards.</div> <div>However, under the forces of the free market, since the positive externality is not felt by the producers or the consumers of R&D (in fact, a reason why firms may be reluctant to invest in R&D is the fear that competing firms may ""piggy-back"" off the R&D for their own production), there will be an under-allocation of resources toward R&D in the free market below the socially optimal/allocatively efficient amount, causing a market failure.</div>" "<div>Describe the details of an Australian government policy designed to encourage R&D.</div>""<div>A 125% to 175%  tax write-off is available to eligible companies that engage in R&D. This means eligible businesses can claim between 125%  and 175%  of the cost of R&D as an expense (i.e., they claim more than they actually spent), reducing the amount of tax they have to pay. A tax concession is equivalent to a grant because it results in less money being paid in tax, and therefore more money remaining in the business.</div>" "<div>Explain (via its supply-side impact) how policies designed to encourage R&D can:</div><div><div><b>∙ </b>Increase R&D, productivity and hence, Aggregate Supply and Productivity</div></div><div><b>∙ </b>Increase economic growth<br></div><div><b>∙ </b>Lower unemployment<b><br></b></div><div><b>∙ </b>Lower inflation<br></div><div><b>∙ </b>International Competitiveness and the Trade Balance<br></div>""<div><div><b>∙ </b>Increase R&D, productivity and hence, Aggregate Supply and Productivity</div></div><div><div>By offering tax offsets for eligible R&D expenditure for companies, the government effectively reduces company R&D investment costs, which may help alleviate some of the risk that previously made them reluctant to invest in R&D. In short, a reduction in the cost of R&D is likely to cause a rise in the level of R&D demand and investment by businesses.</div> <div>The increase in R&D by businesses means that it is likely that more efficient production processes being researched, developed, and implemented. As a result, firms are able to increase their levels of output per unit of resource inputs, greater than previous levels. i.e., there is a rise in productivity.</div> <div>The rise in productivity levels means that the per unit costs of production for firms fall, increasing their profitability levels and hence increasing their willingness and ability to supply. Hence, there is a rise in Aggregate Supply and Productive Capacity. </div></div><div><br></div><div><b>∙ </b>Increase economic growth<br></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary economic growth to rise, assisting in the achievement of strong and sustainable economic growth.</div></div><div><br></div><div><b>∙ </b>Lower unemployment<b><br></b></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth.</div> <div>In addition, due to the higher levels of production, firms' derived demand for labour also increases, causing a fall in the level of unemployment. The generation of supply-side growth assists in the achievement of the goal of full employment.</div></div><div><br></div><div><b>∙ </b>Lower inflation<br></div><div><div>An increase in AS indicates that firms have lower costs of production, which can be passed on to consumers while maintaining profit margins, causing downward pressure on price levels, decreasing cost inflation. This makes economic and employment growth more sustainable in the long term, assisting the achievement of price stability.</div></div><div><br></div><div><b>∙ </b>International Competitiveness and the Trade Balance</div><div><div>Since firm’s overall costs of production have fallen, and there has been a decrease in cost inflationary pressures, this means that the general prices of Australian goods and services have fallen. Holding the level of inflation in other countries constant, this would make Australian goods and services relatively cheaper than their international competitors, making Australia more price internationally competitive.</div> <div> </div> <div>This would result in a rise in export spending (goods and services credits), as they are relatively cheaper for foreigners, and a fall in import spending (goods and services debits), as they are relatively more expensive for Australian consumers. The rise and fall are goods and services credit and debits, respectively, would <b><u>improve Australia's trade balance in the Current Account.</u></b></div></div>" <div>Define ‘subsidy’.</div>"<div>The Government providing local producers with financial assistance or other forms of assistance such as tax concessions, loans or grants to encourage certain activities. </div>" <div>Describe an example of a subsidy (JobKeeper).</div>"<div>As a part of the flood assistance package, in the 22 - 23 budget, the government announced $665  million worth of subsidies for impacted QLD/NSW businesses and farmers for repairs and new equipment.</div>" "<div>Explain (via its supply-side impact) how JobKeeper worked to:</div><div><b>∙ </b>Mitigate the fall in Aggregate Supply<br></div><div><b>∙ </b>Mitigate the fall in economic growth<b><br></b></div><div><b>∙ </b>Mitigate the increase in unemployment<b><br></b></div><div><b>∙ </b>Mitigate the rise in inflation<b><br></b></div>""<div><b>∙ </b>Mitigate the fall in Aggregate Supply<br></div><div><div>The flood support subsidies for farmers were designed to keep Australian farming businesses running and were open to farmers impacted by the floods. The subsidy would reduce a major cost of production (repairs and equipment) for farmers, so their profitability would not fall by as much as it would have without the subsidy. This makes firms more willing and able to produce than they would be without the subsidy, stimulating Aggregate Supply to rise towards pre-supply shock levels.</div></div><div><br></div><div><b>∙ </b>Mitigate the fall in economic growth<b><br></b></div><div><div>The recovery in Aggregate Supply toward the pre-supply shock levels causes surpluses all across the economy at the current prices, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary economic growth to rise toward the pre-supply shock levels, preventing it from falling further.</div></div><div><br></div><div><b>∙ </b>Mitigate the increase in unemployment<b><br></b></div><div><div>The main aim of this flood support subsidy was to minimise the financial strain of the flood on farmers’ budgets, and it prevented businesses significantly impacted by the floods from having to lay off some of their staff. This prevented supply side job losses from rising.</div></div><div><br></div><div><b>∙ </b>Mitigate the rise in inflation</div><div><div>A recovery in AS indicates that firms have lower costs of production (i.e., wages costs), which can be passed on to consumers while maintaining profit margins, causing downward pressure on price levels and mitigating the rising cost inflationary pressures that were caused by the supply shock.</div></div><div><img src=""paste-8a547ce97dc440bac7a3ef0c3e9ac769be69cdd1.jpg""><br></div>" <div>Define ‘infrastructure’.</div>"<div>Infrastructure relates to the key physical or organisational structures within an economy that provide the building blocks around which economic activity takes place</div>" "<div>Describe an example of investment in infrastructure from this year.</div>""<div>In the 2022 - 23 budget, the Government is committing an additional $17.9  billion to infrastructure projects as part of its 10  year infrastructure investment pipeline, which has been increased to a record $120  billion. This includes $3.1 billion for the Melbourne Intermodal Terminals, to take trucks off the road and meet the freight task of the nation.</div>" "<div>Explain (via its supply-side impact) how investment in infrastructure can:</div><div><div><b>∙ </b>Increase Aggregate Supply</div></div><div><div><b>∙ </b>Increase economic growth</div></div><div><div><b>∙ </b>Lower unemployment</div></div><div><div><b>∙ </b>Lower inflation</div></div>""<div><div><b>∙ </b>Increase Aggregate Supply</div></div><div><div>The $2 billion allocated by the government toward the Melbourne Intermodal Terminal, and the total $15.2  billion worth of infrastructure spending (which includes pipeline construction, community infrastructure programs and road upgrades) will lead to higher quality transport and freight routes. That is, the construction of the Melbourne Intermodal Terminal will give firm's access to a faster transport route (as freight is faster and direct compared to roads), while also reducing congestion on existing roads as more firms are now using a new freight route instead of existing roads. Reduced transport times are a form of productivity growth, as firms improve output per unit of input resources. Productivity growth will result in lower per-unit costs of production (e.g., lower fuel costs, and driver wages) for firms, which will increase their profitability and hence increase their willingness and ability to supply. As a result, there is an increase in Aggregate Supply and Productive Capacity.</div></div><div><br></div><div><div><b>∙ </b>Increase economic growth</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary economic growth to rise, assisting in the achievement of strong and sustainable economic growth.</div></div><div><br></div><div><div><b>∙ </b>Lower unemployment</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth.</div> <div>In addition, due to the higher levels of production, firms' derived demand for labour also increases, causing a fall in the level of unemployment. The generation of supply-side growth assists in the achievement of the goal of full employment.</div></div><div><br></div><div><div><b>∙ </b>Lower inflation</div></div><div><div>An increase in AS indicates that firms have lower costs of production, which can be passed on to consumers while maintaining profit margins, causing downward pressure on price levels and decreasing cost inflation. This makes economic and employment growth more sustainable in the long term, assisting in the achievement of price stability.</div></div>" <div>Define ‘tax reform’.</div>"<div><b>Tax Reform</b> refers to the government changing aspects of the tax system to achieve better economic or social outcomes.</div>" "<div>Describe an example of Personal Income Tax reform.</div>""<div>As a part of the 7-year Personal Income Tax Plan, the Government is delivering tax relief to help Australians which includes permanent tax cuts of up to $2565  for individuals in 2022 - 23 , and there will also be a significant flattening of personal income tax rates by 2024 - 25 , were around 95%  of taxpayers will face a marginal tax rate of 30%  or less.</div>" "<div>Explain how cuts to personal income tax may influence (via its supply-side impact):</div><div><div><div><b>∙ </b>Aggregate Supply</div></div><div><div><b>∙ </b>Strong and sustainable economic growth</div></div><div><div><b>∙ </b>Full employment</div></div><div><div><b>∙ </b>Low inflation</div></div></div>""<div><div><b>∙ </b>Aggregate Supply</div></div><div><div>This tax reform increases the financial reward for trading one's labour for a factor income, as it lowers the average rate of tax paid on taxable incomes, hence increasing disposable incomes (factor incomes less tax plus welfare). Since there is more financial reward for working, more people become willing and able to work and hence there is a rise in the labour force participation rate (more people aged 15+ enter labour force). The rise in the labour force participation rate (supply of labour) placing downward pressure on wages, meaning firms face lower production costs which improves profitability, increasing their willingness and ability to supply. As such, aggregate supply and productive capacity rise.</div></div><div><br></div><div><div><b>∙ </b>Strong and sustainable economic growth</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary economic growth to rise, assisting in the achievement of strong and sustainable economic growth.</div></div><div><br></div><div><div><b>∙ </b>Full employment</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth.</div> <div>Due to the higher levels of production, firms' derived demand for labour also increases, causing a fall in the level of unemployment. The generation of supply-side growth assists in the achievement of the goal of full employment.</div></div><div><br></div><div><div><b>∙ </b>Low inflation</div></div><div><div>An increase in AS indicates that firms have lower costs of production, which can be passed on to consumers whilst maintaining profit margins, causing downward pressure on price levels, decreasing cost inflation. This makes economic and employment growth more sustainable in the long term, assisting the achievement of price stability</div></div>" <div>Describe an example of company tax reform.</div>"<div>In the 2021 - 22 budget, the company tax rate for small and medium businesses was cut further to 25%  (it has been gradually falling in recent years, from 30%  in 2014 - 15 ).</div>" "<div>Explain how cuts to company tax rates may influence (via its supply-side impact):</div><div><div><div><b>∙ </b>Aggregate Supply</div></div><div><div><b>∙ </b>Strong and sustainable economic growth</div></div><div><div><b>∙ </b>Full employment</div></div><div><div><b>∙ </b>Low inflation</div></div></div>""<div><div><b>∙ </b>Aggregate Supply</div></div><div><div>Company taxes are a significant cost of production for firms. A slashing of company tax rates means that small and medium businesses are paying less tax, and retaining more of their profits. The reduction in the costs of production through the tax cuts makes production more profitable for firms, making them more willing and able to supply, resulting in a rise in aggregate supply and productive capacity.</div></div><div><br></div><div><div><b>∙ </b>Strong and sustainable economic growth</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary rate of economic growth to rise, assisting in the achievement of strong and sustainable economic growth.</div></div><div><br></div><div><div><b>∙ </b>Full employment</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth.</div> <div>Due to the higher levels of production, firms' derived demand for labour also increases, causing a fall in the level of unemployment. The generation of supply-side growth assists in the achievement of the goal of full employment.</div></div><div><br></div><div><div><b>∙ </b>Low inflation</div></div><div><div>An increase in AS indicates that firms have lower costs of production, which can be passed on to consumers whilst maintaining profit margins, causing downward pressure on price levels, decreasing cost inflation. This makes economic and employment growth more sustainable in the long term, assisting the achievement of price stability.</div></div>" <div>Define ‘immigration policy’.</div>"<div>Australia’s immigration policy is a strategic supply-side policy designed to improve the quantity and quality of the Australian labour force.</div>" "<div>Describe the key features of Australia’s immigration policy:</div><div><div><b>∙ </b>Permanent</div></div><div><b>∙ </b>Temporary</div>""<div><div><b>∙ </b>Permanent</div></div><div><div><b>Australia’s immigration policy is a strategic supply-side policy designed to improve the quantity and quality of the labour force. In 2023/24 the permanent migration cap is set at 190,000 people per year, 70% of which are skilled migrants. These people must have qualifications and experience in one of the professions/trades which are in shortage in Australia.</b></div></div><div><br></div><div><b>∙ </b>Temporary</div><div><div>Temporary migrants can live in Australia for work through a Skill Shortage visa, a working visa that is valid for two years and does not offer a pathway to permanent residency.</div></div>" "<div>Explain how Australia’s immigration policy impacts:</div><div><b>∙ </b>The labour market<br></div><div><b>∙ </b>Aggregate Supply<b><br></b></div>""<div><b>∙ </b>The labour market<br></div><div><div>Skilled immigration causes an increase in the supply of labour i.e., the size of the labour force (the number of people willing and able to work).</div> <div>It also alleviates skills shortages in particular labour markets (e.g., engineers, accountants), preventing excessive wages growth and assisting in wage restraint.</div></div><div><br></div><div><b>∙ </b>Aggregate Supply</div><div><div>With more labour resources available (a larger labour force), firms become more able to produce. The increase in the supply of labour – ceteris paribus – reduces wages, therefore reducing production costs, making production more profitable and firms more willing and able to produce. Skilled migrants bring skills, experience and potentially knowledge of world’s best practice. There is therefore an improvement in labour productivity (output per worker per hour). This results in lower per unit production costs, making production more profitable and firms more willing and able to produce.</div> <div>Therefore, there is an increase in Aggregate Supply and productive capacity.</div></div>" "<div>Explain how Australia’s immigration policy impacts the domestic macroeconomic goals (via its supply-side impact):</div><div><div><b>∙ </b>Strong and sustainable economic growth</div></div><div><div><b>∙ </b>Full employment</div></div><div><div><b>∙ </b>Low inflation</div></div>""<div><div><b>∙ </b>Strong and sustainable economic growth</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth. This would cause the level of long-term, sustainable non-inflationary rate of economic growth to rise, assisting in the achievement of strong and sustainable economic growth.</div></div><div><br></div><div><div><b>∙ </b>Full employment</div></div><div><div>An increase in Aggregate Supply causes surpluses all across the economy, which places a downward pressure on general price levels, causing an expansion in Aggregate Demand and a new equilibrium is reached at a higher quantity produced/consumed as measured by an increase in real GDP growth.</div> <div>Due to the higher levels of production, firms' derived demand for labour also increases, causing a fall in the level of unemployment. The generation of supply-side growth assists in the achievement of the goal of Full Employment.</div></div><div><br></div><div><div><b>∙ </b>Low inflation</div></div><div><div>An increase in AS indicates that firms have lower costs of production, which can be passed on to consumers whilst maintaining profit margins, causing downward pressure on price levels, decreasing cost inflation. This makes economic and employment growth more sustainable in the long term, assisting the achievement of price stability</div></div>" "<div>Explain how a reduction in the migrant intake OR negative net migration might impact the labour market, AS and the domestic macroeconomic goals.</div>""<div><b>Negative Net Migration</b></div> <div>A period of negative net migration means that there has been more people leaving the country than people arriving over a given period of time (e.g., July to September of 2020  there was a period of negative net overseas migration for Australia was negative by 34,800  people). This means there is a decrease in the supply of labour (I.e., the size of the labour force, the number of people willing and able to work has shrunk) This means that skill shortages in particular labour markets (e.g., engineers, accountants) are not alleviated, which contributes to increased wages growth and prevents wage restraint. That is, there would be a decrease in the spare capacity within Australia's labour markets, causing upward pressure on wages (due to the increased bargaining power of workers as a result of a less competitive labour market). This would increase labour costs, and real unit labour costs for firms, result in a rise in per unit costs for firms, making them less willing and able to produce (as the profits for doing so is relatively smaller), causing a decrease in aggregate supply and productive capacity</div><div><br></div><div><div><b>Decrease in annual intake of immigrants</b></div> <div>With a decrease in the annual immigration intake (i.e., from 190,000 to 160,000), it means there is a decrease in the rate of growth of immigration. In terms of the labour market, it means the supply of labour is still increasing, but albeit at a slower rate compared to previous levels where the annual immigration intake was higher per year. Additionally, this may mean the number of skill shortages decreases at a slower rate, potentially resulting in increases in wages growth.</div> <div>As such, with this slow rate of migration the supply of labour increases at a slower rate, all else held constant, may lead to a rise in wages growth (I.e., if supply of labour does not keep up with the demand for labour). This may increase the costs of production, making firms less willing and able to produce, decreasing aggregate supply and productive capacity.</div></div>" "<div>Explain how an improvement/reduction in international competitiveness will impact:</div><div><div><b>∙ </b>The goals of Strong and Sustainable Economic Growth and Full Employment, and living standards</div></div><div><div><b>∙ </b>The goal of Low Inflation, and living standards</div></div>""<div><div><b>∙ </b>The goals of Strong and Sustainable Economic Growth and Full Employment, and living standards</div></div><div><div><b>  - Improvement</b> in international competitiveness will cause a <b>rise in Aggregate Demand</b> (via net exports). Make the usual links to the goals of Strong and Sustainable Economic Growth and Full Employment, and living standards from here.</div> <div> </div> <div>  - <b>Reduction</b> in international competitiveness will cause a <b>fall in Aggregate</b> <b>Demand</b>. Make the usual links to the goals of Strong and Sustainable Economic Growth and Full Employment, and living standards from here.</div></div><div><br></div><div><div><b>∙ </b>The goal of Low Inflation, and living standards</div></div><div><div><b>  - Improvement</b> in international competitiveness will cause a <b>rise in Aggregate Demand</b> (via net exports). Make the usual links to the goal of Low Inflation, and living standards from here.</div> <div> </div> <div><b>  - Reduction</b> in international competitiveness will cause a <b>fall in Aggregate Demand</b>. Make the usual links to the goal of Low Inflation, and living standards from here.</div></div>" "<div>Define ‘'protection', free trade’ and ‘trade liberalisation’.</div>""<div><b>∙ </b><b><u>Protection:</u></b> Government policies designed to give import-competing local firms an advantage over foreign firms e.g. tariffs, subsidies.</div> <div> </div> <div><b>∙ </b><b><u>Trade liberalisation:</u></b> The movement towards free trade, progressively lowering protectionist measures that restrict the movement of goods and services into Australia from other countries. </div> <div> </div> <div><b>∙ </b><b><u>Free trade:</u></b> When countries can buy goods and services from each other free from any protectionist measures i.e. there are no barriers to trade.</div>" "<div>Describe some methods of protection and describe how they have changed in Australia:</div><div><div><b>∙ </b>Tariff</div></div><div><div><b>∙ </b>Subsidy</div></div>""<div><div><b>∙ </b>Tariff</div></div><div><div><b><u>Tariffs are designed to help make foreign goods relatively more expensive compared to local substitutes.</u></b> So that domestic consumers will be more likely to purchase Australian-made products.</div> <div> </div> <div>  - They create higher costs of production for foreign firms, which are passed on to consumers as higher prices.</div> <div> </div> <div>  - On the S-D diagram, there is a decrease in the supply of imports, a higher price and lower quantity traded.</div> <div> </div> <div>  - The government has dramatically reduced tariffs over time</div></div><div><br></div><div><div><b>∙ </b>Subsidy</div></div><div><div>  - Subsidies are designed to help make local goods relatively cheaper compared to foreign substitutes so that domestic consumers will be more likely to purchase Australian-made products.       </div> <div> </div> <div>  - Lower costs of production are passed onto consumers as lower prices. On the S-D diagram, there is an increase in the supply of Australian-made products, a lower price and higher quantity traded.</div> <div> </div> <div>  - The government has progressively reduced subsidies.</div></div>" "<div>Define ‘free trade agreement’ and describe some examples for Australia.</div>""<div><b><u>Free-Trade Agreement</u></b> <b><u>=</u></b> an agreement between two or more countries to reduce protectionism and allow for the freer exchange of goods and services between those countries.</div>" "<div>Explain the effect of trade liberalisation on allocative efficiency and technical efficiency (productivity).</div>""<div><b>∙ </b>Exposure to foreign <b>competition</b> imposes a <b>discipline</b> on Australian producers to lower costs and adopt world’s best practice in production (e.g. invest in better technology) or face closure. This causes a rise in <b>productivity</b> (i.e., a rise in technical efficiency).</div> <div> </div> <div><b>∙ </b>In the <b>short</b> <b>term</b>, inefficient industries will <b>fail</b> without protection (e.g. Australian car manufacturing). In the <b>long-term</b>, resources will be re-allocated to industries where Australia has a <b>comparative cost advantage</b> (those areas where we are relatively more efficient e.g. education / tourism). This causes a rise in <b>allocative efficiency</b>.</div>" "<div>Explain the effect of trade liberalisation on international competitiveness.</div>""<div><b>∙ </b><b><u>Short-term:</u></b> Imports are allowed to penetrate the local market free of protectionist measures such as tariffs and subsidies, causing the relative price of Australian-made products rises compared to imports. Thus, Australia’s international competitiveness in terms of price falls. This results in a rise in import purchases instead of domestically-produced substitutes.</div> <div> </div> <div><b>∙ </b><b><u>Long-term:</u></b> Improved efficiency (explained previously) and thus lower per unit production costs. Australia’s international competitiveness in terms of price improves. This leads to a rise in export sales overseas and fall in import purchases by Australians (i.e., higher price international competitiveness)</div>" "<div>Explain the effect of trade liberalisation on resource allocation, aggregate supply and productive capacity.</div>""<div><b>∙ </b>Creating additional specialisation and a more efficient allocation of resources [generally toward areas in which Australia has a comparative advantage] with lower opportunity costs. More output can be gained from fewer inputs, helping to boost Australia’s production possibility frontier and productive capacity. </div> <div> </div> <div><b>∙ </b>Local businesses reorganise their businesses to become more efficient so they can survive against cheaper imports. This increases productive capacity and the long-term sustainable, non-inflationary rate of economic growth.</div> <div> </div> <div><b>∙ </b>Trade allows local firms access to equipment, materials and technology at a lower cost creating more favourable supply conditions needed to grow Australia’s GDP at a faster rate</div> <div> </div> <div><b>∙ </b>Access to larger markets overseas, helping Australian firms to achieve economies of scale. (Lower tariffs on exports)</div>" "<div>Explain the effect of trade liberalisation on each of the domestic macroeconomic goals:</div><div><div><b>∙ </b>Strong and Sustainable Economic Growth (short-term v long-term), and living standards</div></div><div><div><b>∙ </b>Full Employment (short-term v long-term), and living standards</div></div><div><div><b>∙ </b>Low Inflation, and living standards</div></div>""<div><div><b>∙ </b>Strong and Sustainable Economic Growth (short-term v long-term), and living standards</div></div><div><div><b><br></b></div><div><b>  - ECONOMIC GROWTH (SHORT-TERM)</b></div> <div>Imports penetrate the local market because they have fewer protectionist measures imposed. Domestic sales may fall (Fall in X). A rise in M occurs. This leads to a fall in AD. Falling AD leads to a fall in production (GDP) i.e. a decline in the rate of economic growth</div> <div><b>[Link to goal of SSEG]</b></div> <div> </div> <div><b>  - ECONOMIC GROWTH (LONG-TERM)</b></div> <div>Over time improved efficiency (explained previously) causes per unit production costs to fall. Australian firms can offer lower prices, thus becoming more internationally competitive in terms of price. This will cause a rise in export sales (X) and a  fall in import purchases (M). This will increase AD and production (GDP). This causes higher rates of economic growth. <b>[Link to goal of SSEG].</b></div> <div> </div> <div><b>  - [Link to Living Standards via employment growth/unemployment growth]</b></div> <div> </div></div><div><br></div><div><div><b>∙ </b>Full Employment (short-term v long-term), and living standards</div></div><div><br></div><div><div><b>  - FULL EMPLOYMENT (SHORT-TERM)</b></div> <div>Increased trade liberalisation leads to uncompetitive firms shutting down (e.g. car industry) or restructuring (e.g. replace labour with capital). This causes structural unemployment and the unemployment rate increases, hindering the achievement of the goal of FE in the short term.</div> <div> </div> <div><b>  - FULL EMPLOYMENT (LONG-TERM)</b></div> <div>However, in the long-term, trade liberalisation causes firms to improve productive and allocative efficiency. With higher efficiency international competitiveness improves, increasing AD and economic growth. This will generate employment growth (combination of cyclical and natural growth). Unemployment will fall. This will assist in the achievement of the goal of FE in the long term.</div> <div> </div> <div><b>  - [Link to Living Standards via minimum wage>unemployment benefits → greater access to g/s]</b></div></div><div><br></div><div><div><b>∙ </b>Low Inflation, and living standards</div></div><div><br></div><div><div>  - In the long run, trade liberalisation allows and forces Australia to move its resources into areas where we have a comparative cost advantage, lifting allocative efficiency. Also, competition is increased, imposing discipline on firms to lift productivity; AND imported consumer goods are free from tariffs; AND businesses are able to import some goods used in production at cheaper prices (as tariffs have been removed). This helps to reduce production costs and avoid <b>cost inflation. </b>This helps to achieve the goal of low inflation as it allows for sustainable economic and employment growth without inflationary pressures</div> <div>  - The inflation rate will be more likely to be outstripped by growth in nominal incomes. Real incomes will increase. Purchasing power will increase meaning more <b><u>goods and services</u></b> can be consumed and hence material living standards will increase.</div></div>" <div>Define the Term “Environmental Policies”.</div>"<div><b>Environmental policies =</b> deliberate actions by the government to protect Australia's long term economic prosperity by developing laws and regulations that seek to manage the impact that human activity has on the physical environment.</div>" <div>Define the Term “Inter-Temporal Efficiency”.</div>"<div><b>Inter-temporal efficiency =</b> the allocation of resources that balances the satisfaction of the wants and needs between current and future generations.</div>" "<div>What are the main aims of Environmental Policies?</div>""<div><b>∙ </b>respond to global warming and climate change</div> <div><b>∙ </b>reduce emissions of pollutants into the atmosphere<br></div> <div><b>∙ </b>reduce waste and landfill<br></div> <div><b>∙ </b>reduce the use and depletion of natural resources such as forests and fisheries. <br></div>" "<div>How do severe weather events impact the economy?</div>""<div><b>∙ </b>Severe weather events have detrimental impacts on the productive capacity of the economy, such as:</div> <div> </div> <div>  - Reducing the amount of natural resources available, for example, by destroying agricultural crops and forests</div> <div>  - Diverting the efforts of resources, such as labour and capital, to responding to events rather than generating output</div> <div> </div> <div><b>∙ </b>Channelling government funding into disaster response rather than other areas that could potentially create greater output and employment opportunities</div> <div><br></div><div>  - Reduces inter-temporal efficiency <br></div>" "<div>Describe one example of a budgetary environmental policy initiative.</div>""<div>ERF: “Australia's carbon crediting scheme, the Emissions Reduction Fund (ERF) is a budget allocation by the government that offers entities in the private sector an opportunity to run projects in that avoid the release of greenhouse gas emissions or sequester carbon from the atmosphere. Administered by the Clean Energy Regulator, the 2022 - 23 budget allocated $316.7  million to the fund“</div> <div> </div> <div>RMF: “The Recycling Modernisation Fund (RMF) is a national initiative that is expanding Australia’s capacity to sort, process and remanufacture glass, plastic, tyres, paper and cardboard. Since 2020 , the Australian Government has invested $250  million in new and upgraded recycling infrastructure through the RMF. The Fund will see over $1  billion of investment over its life with the support of states and territories”</div> <div> </div> <div>Carbon Tax: The carbon pricing mechanism (i.e., the Carbon Tax)  put a price on Australia's carbon pollution. Under the mechanism, liable entities had to pay a price ( $25.40/tonne) for the carbon emissions they produced in the 2012 - 13  and 2013 - 14  financial years. The carbon pricing mechanism covered a range of large business and industrial facilities. It did not directly cover the vast majority of Australian businesses, including smaller businesses, or households. The carbon pricing mechanism was repealed, with effect from 1  July 2014 .</div> <div> </div> <div>Emissions Trading Scheme: “Environment Protection Authority (EPA) first determines total acceptable emissions and then divides this total into tradeable units (often called credits or permits). These units are then allocated to scheme participants.</div> <div>Participants that emit pollutants must obtain sufficient tradeable units to compensate for their emissions. Those that reduce emissions may have surplus units that they can sell to others that find emission reduction more expensive or difficult.”</div>" "<div>Explain how this policy impacts Aggregate Supply (in the short term and the long term).</div>""<div><b>∙ </b><u>Short Term: (Example, the ERF)</u></div> <div>  - ERF provides subsidies that incentivise businesses to uptake new technologies or business practices that improve energy efficiency and/or contribute to a reduction in carbon emissions.<br></div> <div> </div> <div>  - This funding can help reduce wastage, and the financial incentive can increase firms’ willingness and ability to produce. </div> <div> </div> <div>  - Increases aggregate supply (incentives to upgrade commercial buildings using energy efficient materials).</div> <div><u><br></u></div><div><b>∙ </b><u>Long Term:</u></div> <div>  - Helps to address climate change and reduce the incidence and/or severity of extreme weather events that impair productive capacity in the future.<br></div> <div> </div> <div>  - Major infrastructure, natural land resources, future government spending and jobs will be protected.</div> <div> </div> <div>  - Helps maintain and boost aggregate supply and productive capacity in the future. </div>" "<div>Explain how this policy impacts inter-temporal efficiency.</div>""<div>(Example, the ERF)</div> <div>With fewer fossil fuels being consumed through the projects introduced, intertemporal efficiency is likely to be improved as more non-renewable fuel resources remain for future generations.</div> <div> </div> <div>Also, containing extreme weather events (which generally destroy resources within the economy) helps to achieve achievement of intertemporal efficiency, as prevents the actions of current generations from impairing the living standards of future generations.</div>" "<div>Explain how this policy impacts living standards (material and non-material).</div>""<div><b>Material Living Standards</b></div> <div> </div> <div>Improvements in productive capacity or AS enable higher levels of aggregate demand to be met without bottlenecks in production due to capacity constraints, and therefore a higher level of production should occur in the economy in the long term. This will increase material living standards, provided economic growth exceeds the population growth rate.</div> <div> </div> <div><b>Non-material living standards:</b></div> <div> </div> <div>By lowering the rate of pollution and reducing greenhouse gas emissions, air quality will also be improved, which improves non-material living standards. </div>" What are the recent figures for inflation?"<img src=""paste-dab917ecfdd1f650934205e05786625d20061c8f.jpg"">" What are the recent figures for economic growth?"<img src=""paste-18a679dee764c4348c0dd887761cd5278a4b6c80.jpg"">" What are the recent figures for Unemployment?"<img src=""paste-ff5b9d20aaddb85638436c22659a8317e17d184a.jpg"">" What are the budget outcomes for 2022-23 and 2023-24 (forecast)?"<div><b>∙ </b>The underlying cash balance was a surplus <b>of $22.1</b><b> billion ( 0.9</b> <b>per cent of GDP) in 2022 </b><b>‑ 23</b>, a dramatic improvement from the forecast $77.9 billion deficit “[the current government]” inherited from the previous government.</div> <div> </div> <div><b>∙ </b>The <b>forecast </b>underlying outcome for 2023 - 24 is a $13.9 <b>billion (</b> 0.5%<b> of GDP) deficit.</b></div>" What are the levels of gross government debt for 2022-23 and 2023-24 (both forecast)?"<div><b>Gross government debt in 2022 - 23 :</b> <b>887 billion</b></div> <div><b>Gross government debt in 2023 </b><b>- 24</b> <b>: 923</b><b> billion</b><br></div>" <b>Material living standards</b>"<div>= consumer’s access to goods and services.</div>" <b>Non-material living standards</b>"<div>= quality of life aspects unrelated to material possessions.</div>" <b>Basic economic problem of relative scarcity</b>"<div>Basic economic problem of relative scarcity arises due to the phenomenon of humans having infinite wants, but a limited number of resources to satisfy those wants. This conflict between infinite wants and finite resources requires decision-making and choices by all economic entities on the allocation of resources.</div>" <b>Opportunity cost</b>"<div>= the value of the next best alternative forgone when a choice is made.</div>" <b>Three economic questions</b>"<div>= what (and how much) to produce, how to produce, and for whom to produce</div><div><div><b><br></b></div><div><b>∙ </b><b>Conditions of perfectly competitive markets =</b> A large number of buyers/sellers, Product homogeneity, Ease of entry and exit</div> <div><b> </b></div> <div><b>∙ </b><b>Assumptions of perfectly competitive markets =</b> Perfect information, Resource Mobility, Self-interested buyers/sellers</div> <div><b> </b></div> <div><b>∙ </b><b>Nature of perfectly competitive markets =</b> High competition, Low prices, High technical + allocative efficiency</div></div>" <b>Efficient allocation of resources</b>"<div>= when scarce resources are allocated in a way that maximises the satisfaction of society’s wants and needs (social welfare), opportunity cost is minimised and no alternative allocation of resources can improve overall social welfare.</div>" "<div>The Four Types of Efficiency are:</div>""<div><b>∙ </b><b>Allocative =</b> Ensuring the most efficient allocation of scarce resources in an economy, meaning resources are producing goods and services most valued by society, and society’s welfare and living standards are  being maximised. No resources are wasted and opportunity cost is minimised. </div> <div> </div> <div><b>∙ </b><b>Technical =</b> Maximising output per unit of input, achieving the least cost method of production and minimising the use of resources in production. Obtaining the greatest possible production of goods and services from available scarce resources (land, labour, capital). Resources not wasted in production process and an economy is producing the best quality product at the lowest opportunity cost. </div> <div><b> </b></div> <div><b>∙ </b><b>Dynamic  =</b>  how quickly an economy can reallocate resources to achieve allocative efficiency, achieved when producers can quickly respond to changes in market conditions</div> <div><b> </b></div> <div><b>∙ </b><b>Intertemporal</b> = when an ideal balance is met between using resources to satisfy needs and wants today but conserving resources for the future. <br></div>" <b><u>Demand</u></b>"<div>the quantity of a good or service that consumers are willing and able to purchase.</div>" <b><u>Law of Demand</u></b>"<div>theory stating that the quantity demanded of a good/service is inversely related to the price of the product.<b><u></u></b></div><div><br></div><div><div><b>∙ </b>As the price of a G/S rises, the quantity demanded contracts.</div> <div> </div> <div><b>∙ </b>As the price of a G/S falls, the quantity demanded expands.</div></div>" <b><u>Income Effect</u></b>"<div>some people may no longer be able to purchase a product as its price increases. At a lower price, more people are able to afford a good/service without forgoing a larger percentage of their income.</div>" <b><u>Substitution Effect</u></b>"<div>People may substitute for other viable (cheaper) goods and services given the option, so demand for the relatively expensive product decreases.</div>" <b><u>Perceived Value</u></b>"<div>A higher price may mean that producers are charging a monetary amount greater than what consumers think the product is worth. As the price goes up, it may exceed the good/service’s perceived value.</div>" <b><u>Diminishing Marginal Utility</u></b>"<div>Each additional unit of consumption yields less benefit/satisfaction for the consumer. Therefore, a lower price is required to induce greater volumes of consumption. At lower prices, consumers tend to purchase greater quantities as the value (utility) of subsequent additional units still exceeds the price.</div>" <b><u>Disposable Income</u></b>"<div>the reward received by households for their contribution to the production process (factor income), minus direct (income) taxes plus welfare benefits.</div>" <b><u>Substitute</u></b>"<div>A G/S which can be used instead of the product in question to fulfil the want/need.</div>" <b><u>Complementary products</u></b>"<div>G/S which tend to be used together and thus have positively related demand.</div>" <b><u>Interest Rates</u></b>"<div>the annual cost of credit or the reward for saving, expressed as a percentage of the principal.</div>" <b><u>Consumer Confidence</u></b>"<div>the psychological attitude of households about future income and employment prospects.</div>" <b><u>Supply</u></b>"<div>the quantity of a good or service that producers are willing and able to offer for sale.</div>" <b><u>Law of Supply</u></b>"<div>theory stating that the quantity supplied of a good/service is directly related to the price of the product.</div><div><br></div><div><div><b>∙ </b>As the price of a G/S rises, the quantity supplied expands.</div> <div> </div> <div><b>∙ </b>As the price of a G/S falls, the quantity supplied contracts. </div></div>" <b><u>Profit Motive</u></b>"<div>Assuming all else is held constant, an increase in prices leads to higher profits for producers, making them more willing and able to produce.</div>" <b><u>Opportunity Cost</u></b>"<div>Also, a higher price means that the opportunity cost of using resources to produce alternative products is now higher, so it is rationally sound for firms to increase production volumes for the current product (to minimize opportunity cost).</div>" <b><u>Per Unit Costs</u></b>"<div>To increase production volumes, the per unit costs of production may rise, and firms seek to maintain profit margins So an expansion in supply is often only viable when prices received for products also rises.</div>" <b><u>Productivity</u></b><div>a measure of output per unit of input of resources.</div> <b><u>Labour Productivity</u></b><div>(output per worker per hour).</div> <div><b>Market Mechanisms = </b></div>"<div>The market mechanism is the system where the free forces of demand and supply for particular goods and services operate to determine relative prices at the point of market equilibrium, which in turn determines resource allocation.</div>" <div><b>Market Equilibrium = </b></div>"<div>The market equilibrium is the balancing point in the market where the quantity supplied equals the quantity demanded. There are no shortages (instances where demand exceeds supply) and no surpluses (instances where supply exceeds demand). </div>" <b><u>Elasticity</u></b>"<div>The responsiveness of demand and supply to its determinants (i.e., a change in price)</div>" "<b><u>Price Elasticity of Demand</u></b>""<div>How responsive the quantity demanded of a product is relative to a change in price (expressed in terms of percentage changes)</div><div><br></div><div><b>∙ </b>𝑃𝐸𝐷 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 / % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒<br></div>" "<b><u>Price Elasticity of Supply</u></b>""<div>How responsive the quantity supply of a product is relative to a change in price (expressed in terms of percentage changes)</div><div><br></div><div><b>∙ </b>𝑃𝐸𝑆 = % change in quantity supplied / % change in price<br></div>" <b><u>Indirect taxes</u></b>"<div>Taxes levied by the government on the responsive of goods/services, which pass on higher costs of production to consumers as higher prices.</div>" <b><u>Spare Capacity</u></b>"<div>The ability of a factory, company, or industry to produce more of a product than is now being produced due to the presence of spare factors of production (land, labour, capital).</div>" <b><u>The Market Mechanism</u></b>"<div>The market mechanism is the system where the free forces of demand and supply for particular goods and services operate to determine relative prices at the point of market equilibrium, which in turn determines resource allocation.</div>" <b><u>Resource Allocation</u></b>"<div>Deciding which goods and services that scarce resources will be used to produce, and in which quantities.</div>" <b><u>Relative Prices</u></b>"<div>The price of one good or service compared to the price of another good or service.</div>" <b><u>Efficiency</u></b>"<div>An “efficient allocation of resources” is when scarce resources are allocated in a way that maximizes the satisfaction of society’s wants and needs (social welfare).</div>" <b><u>Market Failure</u></b>"<div>Market Failure is when the free operation of market forces results in an inefficient allocation of resources which does not maximise the satisfaction of society’s wants and needs (social welfare).<br> </div>" <b><u>Indirect taxation</u></b>"<div>taxes levied by the government on the producers of goods/services, who pass on higher costs of production to consumers as higher prices. </div> <div>(AIM = decrease resource allocation, therefore corrects OVER-ALLOCATION of resources)</div>" <b><u>Subsidies</u></b>"<div>financial support provided by the government to consumers or producers in order to increase the consumption and production of a particular good/service. <br> (AIM = increase resource allocation, therefore corrects UNDER-ALLOCATION of resources)</div>" <b><u>Direct Provision</u></b>"<div>when the government acts as a producer within a market and contributes to the market supply of a good/service directly. </div> <div>(AIM = increase resource allocation, therefore corrects UNDER-ALLOCATION of resources)</div>" <b><u>Government regulations</u></b>"<div>when the government imposes laws that are backed by the use of (financial) penalties that are designed specifically to modify the economic behaviour of firms (mostly)</div> <div>(AIM = decrease resource allocation, therefore corrects OVER-ALLOCATION of resources) *usually</div>" <b><u>Government advertising</u></b>"when the government wishes to steer consumers’ tastes and preferences toward or away from the consumption of a product, and therefore influence the level of resource allocation." <b><u>Negative externality</u></b>"when a decision-maker’s action causes <b>costs </b>for others that are <b>not borne </b>by the decision-maker (i.e., the producers and consumers)" <b><u>Positive externality</u></b>"<div>when a decision-maker’s action causes <b>benefits </b>for others that are <b>not borne </b>by the decision-maker </div>" <b><u>Public Goods</u></b>"<div>goods that are both <b>n</b><b>on-rivalrous</b> (Consumption by one person does <b>not</b> lead to a reduction in the amount available for someone else) and <b>non-excludable</b> (The supplier of the good or service can <b>not</b> stop someone from consuming the good or service). </div> <div>E.g. Street lights, lighthouses, police force, armed forces, free-to-air radio and TV broadcast</div>" <b><u>Common Access Resources</u></b>"<div>productive inputs which are <b>non-excludable</b> (it is impossible to prevent non-payers from consuming the resource) and <b>rivalrous</b> (consumption of the resource by one firm reduces the amount available for others).</div>" "<b>Asymmetric Information</b>""<div>when either the buyer or seller has more information about the good/service being bought/sold than the other.</div>" <b>‘Government failure’</b>"<div>a situation where government intervention in a market does not improve the allocation of resources, or actually makes the allocation of resources less efficient compared to what would happen in a Free Market situation. </div>" <b>The law of unintended consequences</b>"<div>the theory that a government policy will always lead to at least one reaction from either consumers or producers that is unanticipated. </div>" <b>The minimum wage</b>"<div>a wage in the labour market set above the free market equilibrium Price floor. The purpose or intention of the minimum wage is to provide a safety net to low skilled workers. The minimum wage rises over time, as can be seen in the table below</div>" "Minimum wage as of July 2022""<div>Minimum wage as of July 2022 = $21.38  per hour </div>" <b>Real GDP </b>"<div>Real Gross Domestic Product, an estimate of the total value of the final goods and services produced within a nation over a period of time (usually a year) adjusted for inflation.</div>" <b>Life Expectancy</b>"<div><i>the number of <b>years</b> an <b>average</b> person in a nation can expect to <b>live</b></i></div>" <b>Literacy rates</b>"<div>The percentage of people within the working-age population (aged 15+) that can read or write.</div>" <b>Crime Rates</b>"<div>The number of reported crimes (of any kind) divided by the population size. [it is reported yearly].</div>" <b>Gross National Income</b>"<div>GDP + (Cash flows from foreign countries – cash flows to foreign countries). This is a measure of the total level of income within a nation accounting for transactions with overseas economic agents.</div>" <b>Circular Flow Model</b>"Model that shows the flow of <b>money, resources and goods and services</b> in the economy. Illustrates how the Australian economy works and how its different parts are interrelated. " <b>Economic Growth</b>"<div>a rise in the total volume of goods and services produced within a country over a period of time (usually a year).</div>" <b>Inflation</b>"<div>the rise in the general price level over a period of time (usually a year).</div>" <b>Labour market</b>"<div>the availability of employment and labour, in terms of demand and supply.</div>" <b>Boom</b>"<div>a period of strong economic expansion where many businesses are operating at full capacity or above capacity, and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.</div>" <b>Recession</b>"<div>when output has fallen for a period of time and the unemployment rate increases. </div>" <b>Depression</b>"<div>a very severe recession. There is a large contraction in the economy, and the unemployment rate is likely to be at a very high level.</div>" <b>Expansion</b><div>an upwing of economic activity toward a peak.</div> <b>Contraction</b><div>a downswing of economic activity toward a trough</div> <b>Aggregate Demand </b>"<div>The total value of all expenditure or demand on final goods and services produced by a nation over a period of time.</div> <div> </div> <div><b>∙ </b>C =<b> Private consumption</b> spending by households(~ 60% of AD)</div> <div> </div> <div><b>∙ </b>I =<b> Private investment</b> spending by businesses on plant and equipment (most volatile component)</div> <div> </div> <div><b>∙ </b>G1 = <b>Public </b>consumption spending by Governments (purchases do not provide ongoing benefits)</div> <div> </div> <div><b>∙ </b>G2 = <b>Public </b>investment spending by governments (purchases DO provide ongoing benefits)</div> <div> </div> <div><b>∙ </b>X - M = Net overseas expenditure made up of spending on our exports (X) from abroad minus spending on imports (M)  by local residents. </div>" <b>Aggregate Supply</b>"<div>the overall level of production of all types of goods and services that are collectively produced or supplied at given general levels of prices, by the nation’s businesses, measured over a period of time.</div>" <b>Productive Capacity</b>"<div>The economy’s physical limit to produce goods and services when all resources are used to maximum efficiency. </div>" "<b>Aggregate Supply Factors</b>""<div>The major determinants of a nation’s productive capacity or potential level of , especially in the long term.</div>" <b>Disposable income</b><div>Factor income minus Direct taxation plus Welfare benefits</div> <b>Discretionary income</b>"<div>Disposable income, minus Essential expenditure (e.g., utility costs, rent, interest repayments on loans)</div>" <b>Interest rates</b>"<div>Cost of borrowing funds and purchasing on credit;The reward for saving and investing; and the cost of covering existing debt.</div>" <b>Consumer confidence</b>"<div>the level of optimism / pessimism of households about their future income and employment prospects</div>" <b>Business confidence</b>"<div>the level of optimism/pessimism that firms have toward their future profit levels.</div>" <b>The exchange rate</b>"<div>The value of the AUD in terms of other currencies.</div>" "<b>Rates of economic growth overseas</b>""<div>the percentage increase in production (measured by changes in Real GDP) amongst Australia’s overseas trading partners.</div>" <b>Participation rate</b>"<div>the proportion of the working age population (15+) who are willing and able to work i.e. in the labour force (employed or unemployed).</div>" "<b>(Real) Unit Labour Costs</b>""<div>the average cost of labour per unit of output produced (adjusted for inflation).</div>" <b>Productivity</b>"<div>the level of output per unit input of resources.</div>" <b>Labour productivity</b>"<div>the value of output per worker per hour.</div>" "<div><b>Productivity growth</b></div>"more output produced per unit of input of resources "<div><b>Labour productivity growth</b></div>"more output produced per worker per hour <b>SSEG</b>"<div>The fastest rate of economic growth, measured by increases in real/chain volume GDP , consistent with <b><i>strong employment growth</i></b>, but <b><i>without causing excessive inflation</i></b>, <b><i>external instability (Excessive current account deficit or NFD) </i></b>or <b><i>environmental pressures</i></b>. Generally around 3-3.5% a year (What we can increase supply by).</div>" "<b><i>Annual Rate of Economic Growth </i></b>""<div><i>“Year on year growth rate”</i></div> <div> </div> <div><b>∙ </b>Used by calculating the Real GDP dollar values for the latest quarter and comparing them to the values for the quarter one year earlier</div> <div> </div> <div><b>∙ </b>E.g., <i>“growth rate for the year ending June 2022” = {[GDP(June 2022) - GDP(June 2021)] /  GDP(June 2021) } * 100</i></div> <div> </div>" <div><b><i>Quarterly Rate of Economic Growth</i></b></div>"<div><b>∙ </b>Used by calculating the Real GDP dollar values for the latest quarter and comparing them to the  values for the previous quarter </div> <div> </div> <div><b>∙ </b>E.g., <i>“growth rate for the quarter ending June 2022” = {[(GDP(June 2022) - (GDP(March 2022)] / GDP(March 2022} * 100</i></div> <div> </div>" <div><b><i>Annualised Rate of Economic Growth</i></b></div>"<div>Using a quarterly figure and extrapolating an “annual growth” figure by multiplying by 4.<br> E.g., <i>“annualised growth rate for the quarter ending June 2022” = </i><i>{[(GDP(June 2022) - (GDP(March 2022)] / GDP(March 2022} * 100 * 4</i></div>" <div><b><i>Key Statistics:</i></b></div>"<div><b>∙ </b>Year ending June 2022: 3.6%</div> <div><b>∙ </b>Year ending September 2022 : 5.9%</div> <div><b>∙ </b>Year ending December 2022 : _____ (comes out 1/03/2023)<br></div>" "<b>Employed (E) </b>""<div>someone in the working age population ( aged 15+ ) who has a paid job (working at least 1 hour per week).</div><div><br></div><div><b>∙ </b><b>Underemployed: </b>someone who is employed is not working as many hours as they would like.<br></div>" "<b>Unemployed (U)</b>""<div>aged 15+ who does not have a paid job but is actively looking for work.</div> <div> </div> <div><b>∙ </b><b>Long-Term Unemployed: </b>people who have been unemployed for one year or longer.</div> <div><b>∙ </b><b>Frictional Unemployed:</b> people unemployed while they are moving from one job to another.<br></div>" <b>Labour Force (L)</b>"<div># of people in the working-age population who are not working and are not seeking work (i.e., N=#aged 15+ -L).</div>" <b>Hidden Unemployed</b><div>All those potential workers who have given up trying to find work.<b></b></div> "<b>Full employment</b>""<div><i>the lowest rate of unemployment that exists (with zero cyclical unemployment) and one that does not fall below the Non-Accelerating Inflation Rate of Unemployment or NAIRU. This is said to be the target rate of approx. </i> <i> unemployment or perhaps lower (of natural unemployment).</i></div>" <b>Natural unemployment</b>"<div>UE caused by supply-side structural factors that discourage production or aggregate supply</div>" <b>Cyclical unemployment</b>"<div>unemployment caused by weak AD.</div>" <b>Structural unemployment</b>"<div>when the skills of job seekers do not match the skills needed by the industry e.g. Caused by new technology or tariff cutting.</div>" <b>Unemployment rate</b>"<div>percentage of the labour force that is unemployed.</div>" <b>Participation rate</b>"<div>percentage of the working-age population (15+) who are in the labour force <b></b></div>" <b>Underemployment rate</b>"<div>percentage of the labour force that is underemployed.<b></b></div>" <b>Inflation</b>"<div>A sustained rise in the general or average price levels.</div>" <b>Deflation</b>"<div>A sustained fall in the general or average price levels.</div>" <b>Disinflation</b>"<div>A fall in the rate of inflation . I.e., a fall in the rate at which prices are rising.</div> <div> </div> <div><b>∙ </b>The headline rate of inflation refers to the rate of inflation as measured by price movements of all goods and services contained in the CPI.</div> <div><b>∙ </b>The underlying rate of inflation refers to the rate of inflation that is derived from the CPI but excludes various outlying or volatile price movements in order to provide the best indicator of the predominant (underlying) price pressures existing in the economy. <br></div>" <b>Trimmed mean</b>"<div>Measures price changes of CPI items after removing the top 15%  and bottom 15% of price changes (giving middle 70%).</div>" <b>Weighted median</b>"<div>Measures price changes of CPI by using the price change that sits in the middle of the range.</div>" "<b>CPI all groups excluding volatile items</b>""<div>Measures price changes of the CPI after excluding the volatile items of fresh fruit & vegetables and fuel.</div>" "<b><u>Absolute advantage</u></b>""<div>The ability of one country to produce a good or service at a lower <b>cost</b> than another country (i.e. more efficiently).</div>" Comparative advantage"Refers to the ability of one country to produce a good or service at a lower opportunity cost than another country (i.e. relatively more efficiently).<br><br><b>∙ </b>Economies of scale = The fall in average costs per unit that firms experience when they produce a large amount of output, due to the fact that fixed costs can be spread more thinly over a higher amount of output.<br><b>∙ </b>Fixed costs = Costs that are the same irrespective of volume e.g. start-up costs." <b><u>Balance of Payments </u></b>"<div>Record of the financial transactions between Australia and the rest of the world over a period of time (quarter or year)</div>" <b><u>Current account</u></b>"<div>The <i>net flow of money</i> that results from Australia engaging in international trade. Records transactions of a ‘current’ nature i.e. those that do <u>not</u> result in any future obligations</div>" "<b><u>Capital and financial accounts</u></b>""<div>Australia's <i>net change in ownership</i> of assets and liabilities. Records transactions of a ‘capital’ nature i.e. those that do result in future obligations</div>" <b><u>Trade balance</u></b>"<div>The value of goods and services that Australian residents export less those that they import. </div>" "<b><u>Primary income balance</u></b>""<div>The income that Australian residents earn from, less than they pay to the rest of the world from working (e.g. wages) and from financial investments (e.g. dividends).</div>" "<b><u>Secondary income balance</u></b>""<div>Consists of two parts:</div> <div><br></div><div><b>∙ </b>The income that Australian residents earn from, less than they pay to, the rest of the world from the government (e.g. tax payments and refunds).</div> <div> </div> <div><b>∙ </b>Current Transfers: Transactions between Australian residents and the rest of the world where one party provides something to be consumed by another party without receiving anything in return (e.g. emergency food aid).</div>" <div><b><u>Capital Account </u></b></div>"<div><b><u>Capital Transfers </u></b></div> <div> </div> <div><b>∙ </b>Transactions where one party has transferred ownership of something to another party without receiving anything specific in return. For example: </div> <div> </div> <div>  - Forgiveness of debt (so that the borrower no longer has to pay back what they borrowed) </div> <div>  - Conditional grants for capital projects (e.g. foreign aid to build roads, dams and schools)<br></div> <div>  - Transfer of assets between residents and non-residents.<br></div> <div> </div> <div><b>∙ </b><b><u>Acquisition/disposal of Non-produced, Non-financial Assets </u></b></div> <div> </div> <div>  - Transactions that involve intangible assets (e.g. brand names, copyrights and trademarks) and rights to use land or water (e.g. for mining or fishing).</div>" <div><b><u>Financial Account </u></b></div>"<div><b>∙ </b><b><u>Direct investment </u></b></div> <div><b> </b></div> <div>  - Financial transactions related to long-term capital investment in a business (e.g. purchase of machinery, buildings and factories), where the investor has significant  per cent or more — voting power in the business (i.e. through ownership of ordinary shares or voting stock). </div> <div> </div> <div><b>∙ </b><b><u>Portfolio investment </u></b></div> <div><b> </b></div> <div>  - The purchase of equity or debt (shares or bonds) in a business. In contrast to direct investment, portfolio investment occurs when the investor does not have an influence on the operation of the business. </div> <div> </div> <div><b>∙ </b><b><u>Financial derivative </u></b></div> <div><b> </b></div> <div>  - The purchase or sale of financial derivatives (i.e. financial contracts between two parties where the value is derived from another financial instrument, such as a bond or share, or a market index). These transactions involve the exchange of risk between parties, rather than funds.</div><div><br></div><div><div><b>∙ </b><b><u>Reserve assets </u></b></div> <div><b> </b></div> <div>  - The purchases or sale of reserve assets held by the Reserve Bank. These reserves are assets controlled by the Reserve Bank to meet policy objectives such as intervention in the foreign exchange market and to assist the Australian government in meeting its commitments to the IMF. </div> <div> </div> <div><b>∙ </b><b><u>Other investment </u></b></div> <div><b> </b></div> <div>  - Transactions that do not fit into one of the other categories. One example is 'trade credit' where an importer purchases goods from overseas and does not pay for the goods until they are received. </div> <div> </div> <div>  - Another example is 'currency and deposits, where money is deposited in or withdrawn from banks across borders, or banknotes and coins are transferred between countries.</div></div>" <b>Structural component of the CA </b>"<div>the ongoing CA balance that exists when the economy is running at its long run trend rate of growth (approximately 3% per annum).</div>" <b>Cyclical component of the CA </b>"<div>the change to the CA balance which occurs in line with the economic/business cycle.</div>" <b>Net International Investment position/ Net Foreign Liabilities </b>"<div>The value of Australia’s net international financial obligations to the rest of the world. This is made up of Australia’s stock of net foreign liabilities (NFLs), which is made up of both net foreign debt (NFD) and net foreign equity (NFE). </div>" <div>Net Foreign Liabilities include:</div>"<div><b>∙ </b>Net Foreign Debt – Financial obligations that flows from our total borrowing from overseas exceeding our total lending to overseas.</div> <div> </div> <div><b>∙ </b>Net Foreign Equity – Financial obligations that stem from foreign ownership of Australian assets, less Australian ownership of foreign assets.</div>" <b>Exchange Rate</b>"The value of the Australian dollar when compared to another currency or a basket of currencies of our major trading partners.  " <b>(Bilateral) Individual exchange rates</b>"Relative price of one currency in terms of another." <b>Trade Weighted Index (TWI)</b> "<div>The average exchange rate compared to a weighted basket of foreign currencies of Australia’s trading partners.</div>" <b>DEMAND</b>"<div>The DEMAND for Australian dollars refers to how much foreign currency is being converted into  Australian dollars.</div>" <b>SUPPLY</b>"<div>The SUPPLY of Australian dollars refers to how many Australian dollars are being converted into  foreign currency.</div>" "<b>Interest rate differential</b>""<div>The level of interest rates in Australia relative to overseas.</div>" <b>Terms of Trade</b>"<div>Australia’s export prices as a ratio of import prices.</div>" "<b>International Competitiveness</b>""<div>The degree to which Australian goods and services can compete with international markets in terms of price and quality.</div>" "<b>Credit Rating</b>""<div>An estimate of the ability of a person or organization [country] to<b> fulfil</b> their financial <b>commitments</b>, based on previous <b>dealings.</b></div>" <b>Terms of trade</b>"<div>Terms of trade is equal to the ratio of the average prices received for exports relative to the average prices paid for imports.</div>" <b>International competitiveness</b>"<div>International competitiveness is a country’s ability to compete in global markets for goods and services. Competition can be based on price or non-price factors (E.g. Service or quality). </div>" <b>Productivity</b>"Productivity is the level of output per unit of input – Total output per unit of input. It is a measure of how efficiently resources are being used to produce goods and services." <b>Labour productivity</b>"<div>Labour productivity is GDP per hour worked.</div>" <b>Capital productivity</b>"<div>Capital productivity is Output per machine hour.</div>" <b>Multifactor productivity</b>"<div>Multifactor productivity is the efficiency with which the combined inputs of labour, capital and natural resources are converted into production.</div>" <b>Boom</b>"<div>A period of strong economic expansion where many businesses are operating at full capacity or above capacity and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.</div>" <b>Recession </b>"When output has fallen for a period of time and the unemployment rate increases. " <b>Depression </b>"<div>A very severe recession. There is a large contraction in the economy and the unemployment rate is likely to be at a very high level.</div>" "<b>Aggregate Demand (AD) policies</b> (macroeconomic policies)""<div>Policies that involve regulating Aggregate Demand (AD) in a <b>counter-cyclical</b> way i.e. adopting a contractionary stance during a peak to slow AD and an expansionary stance during a trough to accelerate AD, e.g. budgetary policy and monetary policy.</div>" " <b><span lang=""EN-AU"" style=""line-height: 107%;"">Budgetary policy (fiscal policy)</span></b>""<div>An aggregate demand policy involving government manipulation of the level and composition of its revenue and expenses in order to achieve its goals.</div>" <b>Monetary policy</b>"<div>An aggregate demand policy implemented by the Reserve Bank of Australia (RBA) on behalf of but independent of the Federal government involving influencing the cost and demand for credit (primarily via interest rates) in order to achieve its goals.</div>" <b>Conventional Monetary Policy</b>"<div>Monetary policy implemented by the RBA to achieve their <br> goals which involve the manipulation of interest rates.</div>" <b>Exchange Settlement Account</b>"<div>Exchange Settlement Accounts (ESAs) are the means by <br> which providers of payment services (banks) settle obligations that have accrued in the clearing process.</div> <div> </div> <div><b>∙ </b><i>It is a special bank account which allows banks to settle transactions with other banks at the end of each day. </i></div>" <b>Short-Term Money Market </b>"A financial market where financial instruments with high liquidity and short-term maturities (basically cash) are traded between the RBA and other commercial banks. " <b>Open market operations </b>"<div>The reserve bank buying or selling Commonwealth Government Securities (CGS), which are also called Government Bonds or Repurchase Agreements (repos), to participants in the cash market (primarily banks) to manipulate the supply of cash in the short-term money market.</div>" <b>Cash Rate </b>"The interest rate of the short-term money market." "<b>The policy interest rate corridor</b>""<div>A (price) floor and a (price) ceiling around the cash rate target in the Australian cash market. </div>" <b>Unconventional Monetary Policy </b>"<div>Tools other than changing a policy interest rate being used by the RBA to achieve its goals.</div>" <b>Forward guidance</b>"<div>Central bank's communication of the ‘stance’ of monetary policy. It lets market participants and the general public know what the future path of the policy interest rate and potentially other aspects of monetary policy is likely to be. Forward guidance can be:</div> <div> </div> <div><b>∙ </b>Time-based; or</div> <div><b>∙ </b>Based on the state of the economy.<br></div>" <b>Transmission mechanisms</b>"<div>the four ways that a change in the cash rate, and therefore interest rates, impacts AD, economic activity, and inflation.</div>" " <b><span lang=""EN-US"" style=""line-height: 107%;"">Tighten monetary policy</span></b>"Cash rate is raised to slow down economic activity and reduce inflation <b>Loosen monetary policy</b>"<div>Cash rate is cut to stimulate economic activity and raise employment prospects/ reducing unemployment.</div>" The Stance of Monetary Policy can be:"<div><b>∙ </b><b>Expansionary</b>: accelerating AD, indicated by a cash rate of less than .</div> <div> </div> <div><b>∙ </b><b>Contractionary</b>: slowing AD, indicated by a cash rate of more than .</div> <div> </div> <div><b>∙ </b><b>Neutral</b>: neither accelerating nor slowing AD, indicated by a cash rate of approximately .</div>" "<div>Describing the <u>stance</u> of monetary policy can be:</div>""<div><b>∙ </b><b>Expansionary</b> = accelerating AD, indicated by a cash rate of less than .</div> <div> </div> <div><b>∙ </b><b>Contractionary</b> = slowing AD, indicated by a cash rate of more than .</div> <div> </div> <div><b>∙ </b><b>Neutral</b> = neither accelerating nor slowing AD, indicated by a cash rate of approximately .</div>" "<div>The RBA implements monetary policy counter-cyclically <b>to lessen the extremes of the business cycle</b> i.e.,</div>""<div><b>∙ </b>expansionary stance during trough.</div> <div><b>∙ </b>contractionary stance during peak.<br></div> <div><b>∙ </b>neutral stance if experiencing domestic economic stability.</div>" <div>Describing <u>changes</u> in Monetary Policy</div>"<div><b>∙ </b><b>Loosening</b> = lowering interest rates</div> <div> </div> <div>  - Could be more expansionary / less contractionary.</div> <div> </div> <div><b>∙ </b><b>Tightening</b> = raising interest rates</div> <div> </div> <div>  - Could be more contractionary / less expansionary.</div>" <div><b><u>Monetary Policy in 2022</u></b></div>"<div><b>∙ </b>From May (+0.25%)  to December (+0.25%)  the RBA increased the cash rate for 8 consecutive periods (by 25/50  basis points each month), taking the cash rate from 0.1%  as of January 2022 to 3.1%  as of December 2022 i.e., tightened monetary policy.</div> <div> </div> <b>∙ </b>This has resulted in a movement toward a contractionary monetary policy stance<br>" <div><b><u>Monetary Policy in 2023</u></b></div>"<div><b>∙ </b>In February (+0.25%), March (+0.25%) and May (+0.25%), the RBA increased the cash rate i.e., tightened monetary policy.</div> <div> </div> <div><b>∙ </b>This has cemented RBA’s contractionary monetary policy stance.</div>" <b>Budgetary Policy (fiscal policy)</b>"<div>To the anticipated changes in the Federal Government’s revenues (receipts) and expenses outlays for the next financial year that is implemented in a counter-cyclical manner to stabilise the extremes of the business cycle.<b></b></div>" <b>Direct Taxes</b>"<div>Taxation that is paid directly by economic agents and it usually varies with income earned.</div>" <b>Indirect Taxes</b>"<div>Taxes that are levied on the purchases made by economic agents either made to consumers or onto firms (which is then passed onto consumers).</div>" <b>Non-Taxation Revenue</b>"<div>Revenue earned by the government that is not a form of taxation but rather based on their direct participation in the private sector.</div>" <b><u>Capital Gains Tax</u></b>"<div>CGT is levied on the profits made from the buying and selling assets (such as property and shares). Capital gains tax is applied at only  of the capital gain meaning you only pay half as much tax as you would on normal income.<b><u></u></b></div>" <b><u>Medicare Levy</u></b>"<div>This is levied to cover the cost of providing highly subsidised healthcare to Australians. Generally speaking, the rate was 1.5% (In 2013/14  budget it was increased to 2%  and in the 2017/18  budget 2.5%  and is currently 2% ).<b><u></u></b></div>" <b><u>Fringe Benefits Tax</u></b>"<div>This is levied on the non-cash payments that individuals receive as part of the salary package. It is paid by the employer but some employers charge it back to the employee.<b><u></u></b></div>" <b><u>Superannuation fund tax</u></b>"<div>Contributions to superannuation and the income that is earned through dividends, capital gains and interest are both taxed at <b><u>15%.</u></b></div>" <b><u>Petroleum Resource Rent Tax</u></b>"<div>This is levied on the profits made from offshore petroleum operations. It is currently 40% of profits.<b><u></u></b></div>" <b><u>Excise Duty/ tax</u></b>"<div>This is levied on selected locally produced goods such as coal, petrol, LPG, alcohol, cigarettes. It is usually a flat amount per unit of measurement. For example, petrol is approximately 30 cents per litre.<b><u></u></b></div>" <b><u>Tariffs</u></b>"<div>These are taxes that are levied on selected imported goods Automobiles have a 5%  tax and textile, clothing and footwear are levied at between 5% to 10% .<b><u></u></b></div>" <b><u>Goods and Services Tax</u></b>"<div>We pay the GST to businesses when we buy most goods and services and they, in turn, pass it on to the federal government. The GST is levied at 10%, and it is levied on the majority of things purchased in the Australian economy. Exempt items include those things produced for export, basic food items, gifts to charities, healthcare, medicines, car registration, child care and education.</div>" <b><u>Revenue from government business</u></b>"<div>Income earned through business revenue in the public sector run by the government (e.g., AusPost) <b><u></u></b></div>" <b><u>Sale of government assets</u></b>"<div>Income earnt by the offering of government assets for purchases to households, businesses and other foreign investors/ entities/privatisation of government business enterprises (GBEs).</div>" <b>Progressive Taxes</b>"<div>Progressive taxes mean the rate of tax individuals pay increases as they earn more (E.g. The percentage).<b> Examples: </b>Income tax, capital gains tax.<b></b></div>" <b>Proportional/flat Taxes</b>"<div>Levied at a set rate E.g. 2%  of individuals or companies income. The more you earn the more tax you pay, however, the rate is the same for lower and high-income earners.<b> Examples: </b>Medicare levy, superannuation, and company taxes.<b></b></div>" <b>Regressive Taxes</b>"<div>Taxes that make up a higher percentage of low-income earners' income. Often indirect taxes on consumers spending rather than income.<b> Examples: </b>GST, excise taxes<b></b></div>" <b>Government consumption spending</b>"<div>Payments for goods and services that are consumed in the current budget period and don’t lead to ongoing benefits in the future (is a part of AD).</div> <div> </div>" <b>Government investment spending</b>"<div>The purchase of capital equipment that will have an ongoing benefit to the economy<u></u></div>" <b>Government transfer payments</b>"<div>Transfers to the private sector from the government.</div>" <b>Headline Cash Outcome</b>"Total cash received by the Federal Government less the total cash paid (can often be misleading because it includes receipts that do not directly impact on Australia’s economy)." <b>Underlying cash outcome</b>"<div>Headline outcome, but excluding the cash flows that are included in the headline cash outcome that do not impact on Australia’s economy.</div>" <b><i><u>Crowding Out</u></i></b>"When increased government spending (Budget deficits) causes an increase in <br> interest rates and a reduction in investment, export demand and consumption spending." <b>Debt</b>"money owed BY one party (the borrower) TO another party (the lender) as a result of  a past transaction." <b>Public Debt </b>"money owed BY the government (the borrower) TO another party (the lender) as a result of a past transaction." <b>Measures of government debt</b>"<div><b>1.<span style=""font-weight: normal;""> </span></b><b><u>Gross Government Debt</u></b><b> =</b> total amount of money the government owes</div> <div> <b>2.<span style=""font-weight: normal;""> </span></b><b><u>Net Government Debt </u></b><b>=</b> total amount of money the government owes minus total amount of money owed to the government.</div>" <b><u>Fiscal Consolidation</u></b>"<div>Stated medium-term fiscal strategy to achieve a budget surplus over the course of the business cycle (so that government debt does not accumulate).</div>" <b>Automatic stabilisers</b>"<div>Automatic stabilisers are built-in aspects of the budget that change in response to economic conditions in a counter-cyclical way without any deliberate action by the government.</div>" <b>Discretionary stabilisers</b>"<div>Discretionary stabilisers are deliberate actions taken by the government to change revenue or expenses in a counter-cyclical way.</div>" <div><b>The Stance of Budgetary Policy in 2022-23</b></div>"<div><b>∙ </b>The budget outcome was an underlying surplus of $4.2  billion in 2022/23. </div> <div> </div> <div><b>∙ </b>Even though the budget outcome was a moved from deficit to a surplus since 2021-22, the stance in 2021/22 was considered mildly expansionary as the structural budget deficit (discretionary stabilisers only) rose compared to 2021-22.</div>" <div><b>The Stance of Budgetary Policy in 2023-24</b></div>"<div><b>∙ </b>The budget outcome for 2023-24 is forecast as an  underlying deficit of  billion down from the surplus in 2022-23.</div> <div><br></div> <div><b>∙ </b>The deficit implies a more expansionary budgetary policy stance by itself, as the government contribution to AD (the ‘net fiscal stimulus’) increases**.</div> <div> </div> <div><b>∙ </b>Despite there being cyclical improvements to budget figures (as a result of higher commodity prices and a tight labour market), the increase in revenue has not flowed through to a larger improvement in the budget outcome. </div> <div> </div> <div><b>∙ </b>Much of the gains from these two key cyclical factors have in fact been spent via discretionary spending measures.  </div> <div> </div> <div><b>∙ </b>This has increased the ‘structural deficit’ of the budget, further contributing to the expansionary nature of the 2023-24 Budget. </div>" <b>Aggregate Supply</b>"<div>Total volume of all goods and services produced in Australia over a period of time (year).</div>" <b>Productive Capacity</b>"<div>The economy’s physical limit to produce goods/services when all resources are used to maximum efficiency.</div>" <b>Productivity</b>"<div>The level of output per unit of input of resources.</div> <div>E.g. Labour productivity = the value of output produced per worker per hour.</div>" <b>International Competitiveness</b>"<div>The ability of Australian firms to meet the test of other countries in terms of price and quality.</div>" <b>Efficient allocation of resources </b>"<div><b>∙ </b>An efficient allocation of resources is when scarce resources are allocated in a way that maximises the satisfaction of society’s wants and needs (social welfare).</div> <div> </div> <div><b>∙ </b>The opportunity cost will be minimised, and no alternative allocation of resources can improve social welfare. It will be impossible to make someone better off without making someone else worse off.</div> <div> </div> <b>∙ </b>The four types of efficiency are at a maximum.<br>" <b>Allocative efficiency </b>"<div>Allocating resources to the production of goods and services in a way that maximises the satisfaction of society’s wants and needs. i.e.: producing the ‘right’ goods and services and producing them in the ‘right’ quantities.<b></b></div>" <b>Technical/productive efficiency </b>"Maximising output per unit of input i.e.: minimising production costs (producing g & s in the ‘right’ way)." <b>Dynamic efficiency </b>"<div>How quickly an economy can reallocate resources to achieve allocative efficiency in response to changing economic conditions.<b></b></div>" <b>Inter-temporal efficiency </b>"<div>Balancing the allocation of resources between the present and the future i.e. satisfying today’s wants and needs without jeopardising the ability to satisfy wants and needs in the future.</div>" <b>Human capital</b>"<div>the level of contribution that workers can make to the production process marked by their skills, experience and level of education.</div>" <b>Research & development grants</b>"<div>the financial support provided to firms by the government to reduce the costs associated with undertaking research development making it inherently less risky for firms (as they are risking fewer funds to undertake the research).</div>" <b>Subsidies</b>"<div>the provision of financial support for local producers by the government, or some other form of tax concessions, loans, or grants to encourage certain activities.</div>" <b>Infrastructure</b>"<div>the key physical or organisational structure within an economy that provides the ‘building blocks’ around which economic activity takes place.</div>" <b>Tax Reforms </b>"The government changing the aspects of the tax system to achieve better economic (or social) outcomes." <b>Immigration</b>When people enter and settle in a country where they are not native. <b>Trade Protection </b>"<div>government policies designed to give import-competing local firms an advantage over foreign firms, e.g., tariffs, subsidies.</div>" <b>Trade Liberalisation </b>"the movement towards free trade, progressively lowering protectionist measures that restrict the movement of goods and services into Australia from other countries" <b>Free Trade </b>"when countries can buy goods and services from each other free from any protectionist measures i.e., there are no barriers to trade" <b>Tariff</b>a tax on imports <b>Subsidies</b>cash payments made to local producers <b>FTA</b>"<div>an agreement between two or more countries to reduce protectionism between those countries</div>" <b>International Competitiveness </b>"<div>Australia’s ability to compete with other countries based on price and quality.</div>" <b>Environmental Policies </b>"deliberate actions by the government to protect Australia's long-term economic prosperity by developing laws and regulations that seek to manage the impact that human activity has on the physical environment." <b>Inter-temporal Efficiency </b>"<div>the allocation of resources that balances the satisfaction of the wants and needs between current and future generations.</div>" <b>Market-Based Policies </b>"<div>government interventions that seek to influence the behaviour of economic agents via the use of 'market forces', which ultimately involves the manipulation of prices to impact producer and/or consumer behaviour. </div>" <b>Non-Market-Based Policies </b>"the use of regulations, including the setting of standards and/or prohibitions, as well as government investment in research and general monitoring or control of an environmental issue rather than the manipulation of ‘prices’ to achieve environmental outcomes." <b>Australian Carbon Credit Unit (ACCUs)</b>"<div>financial instrument awarded to eligible energy efficiency, renewable energy generation and carbon sequestration projects that result in a reduction of Greenhouse Gas emissions. One ACCU represents the avoidance or removal of one tonne of carbon dioxide equivalent.</div>" <b>Carbon Abatement Contract </b>"<div>a contractual arrangement to sell Australian carbon credit units (ACCUs) to the Commonwealth if you are successful at an ERF auction.</div>" <b>Emissions Trading </b>"a market-based scheme for environmental improvement that allows parties to buy and sell permits for emissions or credits for reductions in emissions of certain pollutants."

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