Year 12
HSC
Economics
2014
Year 12 Economics HSC tips
2014
Short answers
2009
2010
Inflation
TOT
Trade
2011
Trade
Agreements
case study
Fiscal Policy Globalisation/case CAD
study
Environment Fiscal Policy
Wage
Determination
Protection
Exchange Rates
Environment
Subsidies
2012
Protection and
Free Trade
2013
Environmental
issues
Inflation
Multiplier/Eco
growth
Income
CAD/Foreign
Inequality
Debt
Unemployment Micro reform
Exchange rate
Past extended responses (stimulus based)
2013
Explain how movements in the Australian dollar can affect the performance of the Australian
economy.
Explain the effects of Australia’s macroeconomic policy mix on economic growth and
inflation in the domestic economy
2012
Analyse the impact of changes in the global economy on Australia’s Balance of Payments.
Analyse the impact of changes in the global economy on the structure of industry in the
Australian economy.
2011
How does fiscal policy affect economic activity and income distribution in the Australian
economy?
How does monetary policy affect inflation and unemployment in the Australian economy?
2010
Discuss the economic concerns that the Australian Government takes into account when
formulating policies to manage the environment.
Discuss the consequences for Australia of an unequal distribution of income and wealth, and
the policies that can be used to address this issue.
2009
Discuss the impact of microeconomic policies on Australia’s economic performance.
With reference to Australia and at least ONE other economy, discuss the impact of
globalisation on development and the distribution of global wealth.
2008
Evaluate the effectiveness of fiscal policy in achieving Australia’s economic objectives.
Evaluate the effectiveness of monetary policy in achieving Australia’s economic objectives
2007
Discuss the impact of sustained fiscal surpluses on resource use and economic activity in the
Australian economy.
Explain how Australia’s labour market policies have affected work practices and employment.
Past extended responses
2013
Analyse the effects of domestic AND global free trade and protection policies on the
Australian economy.
Analyse the causes of unemployment and its effects on the Australian economy.
2012
For an economy other than Australia, discuss the effects of globalisation on economic growth
and the quality of life.
Discuss the effectiveness of economic policies in achieving the Australian government’s
economic objectives.
2011
Discuss the effects of microeconomic reform on product and factor markets in the Australian
Economy.
Discuss the impact of changes in the domestic and global economy on Australia’s exchange
rate.
2010
Analyse the causes and effects of fluctuations in Australia’s external stability.
Analyse the effects of protectionist trade policies on the Australian economy.
2009
Analyse the federal government’s macroeconomic policy mix to address inflation and
unemployment in the Australian economy.
Analyse the impact of changes in the global economy on Australia’s economic growth and
external stability.
2008
Discuss the influence of international organisations and contemporary trading blocs and
agreements in promoting globalisation.
Discuss the effects of an appreciation of the Australian dollar on Australia’s internal and external
stability.
2007
Discuss the economic implications for the Australian economy of Australia’s continuingcurrent
account deficits.
For an economy other than Australia, explain how government development strategies have
responded to the process of globalisation.
Year 12 Economics- Topic Summary
Topic 1- The Global Economy
The focus of this study is the operation of the global economy and the impact of the
globalisation process on individual economies.
International economic integration
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Global economy/globalisation/GWP/international business cycle/ changing global
community
Free Trade v Protection
Trading Blocs – role of EU and USA
International Organisations - WTO, World Bank, IMF
Globalisation and economic development
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differences between economic growth and economic development
distribution of income and wealth
income and quality of life indicators
developing economies, emerging economies, advanced economies
reasons for differences between nations
effects of globalisation
trade, investment and transnational corporations
environmental sustainability
the international business cycle.
Globalisation
Introduction
What is globalisation?
Globalisation is the integration of individual economies to create a global market.
Globalisation is occurring via trade, financial flows, investment, labour movements and the
use of technology. The aim of globalisation is to raise living standards globally; however,
there are a number of barriers that are preventing the benefits of globalisation spreading to all
countries.
Body
Outline each of the factors causing globalisation
Trade – growth in global trade is double the growth of GDP. Trade creates employment
because it is a source of aggregate demand. Trade continues to be restricted by protection and
trading blocs eg EU and NAFTA. These trading blocs promote internal trade but discriminate
against non-members. This is having a significant on global inequality. The rich countries are
getting richer and the poor countries are getting poorer because they find it so hard to gain
access to the EU and NAFTA. Emerging economies (China and India are having a significant
impact on global trade)
Finance- Fastest growing indicator of globalisation- money transfers to buy foreign currency
for speculation and saving. Speculation is now the major factor determining exchange rates.
Financial flows have caused lots of financial instability in currency markets eg. GFC
Investment – FDI has grown dramatically (7X larger than 10 years ago). TNCs now are the
major driving force behind economic growth in developed and underdeveloped countries.
This raises many issues about the exploitation of labour in less developed countries (Nike in
Indonesia) Discuss positives and negatives
Labour Movement – Labour movement tends to be at the top end and bottom end of skills.
Highly skilled workers are attracted to the larger economies (US and Europe) and low skilled
labour is attracted to developed countries (Indonesian maids in Singapore)
Technology – has played a key role in trade, finance, investment and labour movements. The
internet has provided information and communications globally thus increasing the pace of
globalisation
International Business Cycle- As economies are more integrated international factors have a
greater influence on domestic economies (draw the business cycle). A recession in the USA
has an impact Japan and then the whole world. Australia’s exports are now more dependent of
the Chinese business cycle and the demand for resources. Domestic interest rates are affected
by overseas interest rates as countries try to attract foreign savings. Exchange rates are more
volatile due to speculation. Many countries have experienced structural change as protection
levels have fallen globally.
Conclusion
Protection, Free Trade and Trade Organisation
Introduction
What is protection?
Protection is an artificial advantage given to domestic producers when competing with foreign
imports. Free Trade is the removal of all protection so that market forces can operate freely.
Generally the world has been moving towards less protection due to the WTO. However,
protection still exists in a number of regions due to trading blocs.
Body
Outline briefly the different types of protection and their impact
Tariffs, subsidies, quotas, local content rules, embargoes.
Short term benefits to employment, long term problems as prices rise and resources are
wasted. Protection encourages production by inefficient industries at the expense of efficient
industries.
Outline the advantages of free Trade
Specialisation, economies of scale, efficient resource allocation, international
competitiveness, innovation, higher living standards
Role of the WTO
Attempts to promote free trade and encourage countries to decrease protection- has had
considerable success in reducing protection on industrial goods- has had very little success
with reducing protection on agricultural goods.
The Doha round concentrated on agricultural protection in an effort to improve living
standards in the poor world- most developing economies depend on agricultural exports but
find it difficult to gain access to EU and USA. The Doha Round failed.
The WTO also attempts to settle trade disputes among member countries
World Bank
WB provides development loans to developing economies. WB’s aim of the next 10 years is
to reduce by 50% the proportion of the world’s population living in absolute poverty. The
World Bank also supports a program to reduce the debt levels of the world’s poorest
countries.
International Monetary Fund
Supports globalisation and free market theory. The IMF assists countries that are experiencing
problems with exchange rate instability. The IMF usually develops a strategy for poor
countries based on structural adjustment, free markets and modernisation.
Trading blocs and free trade agreements
Trading blocs have restricted the progress of free trade. The EU and NAFTA discriminate
against non-members. They encourage an increase in trade between member countries but a
decrease in global trade because they are protecting their own inefficient industries. In general
the poorest countries in the world experience the greatest problems in gaining access to highincome markets.
In recent years there has been a movement towards free trade agreement. Australia has free
trade agreements with New Zealand, Thailand, Singapore, Japan and the USA
Conclusion
Globalisation and Economic Development
Introduction
What is globalisation / economic development?
Define globalisation. Outline trade, finance, investment, labour mobility and technology as
reasons for/ features of globalisation/change in global economy. Explain that globalisation has
had a positive impact on trade, finance, investment labour mobility and technology but there
are also negative consequences.
Body
Explain what the global economy is like
High income countries (USA, Japan, Australia etc) have approx 15% of the world’s
population but earn approx 70% of the world’s total income. Low income countries (Vietnam,
Cambodia, Uganda etc) have approx 45% of the world’s population but earn approx 5% of the
world’s total income.
Outline the characteristics of Advanced Economies (USA), Emerging Economies (China),
Developing Economies (ranges from middle income to low income economies – Cambodia).
Economic Development (Global Issues)
Global trade barriers are restricting trade. Trading Blocs (EU and NAFTA) limit trade from
developing countries.
Investment from AEs mainly occurs in other AEs. There has been significant investment in
emerging economies (China, Malaysia) but many African and South American countries are
generally ignored by TNCs.
Global aid and assistance to developing economies is very small- only 0.24% of GWP. Aid is
often tied thus benefiting the donor country.
Access to technology is restricted in most developing countries.
Economic Development (Domestic Issues)
Many developing countries lack access to capital funds for private investment- are often
highly indebted to foreign banks. There is a shortage of skilled labour- most depend on
agriculture for export income and lack the industrial base required to produce high value
added exports. Population growth is usual high causing problems in major cities. Govt
corruption is common.
Impact of development and growth
Economic growth and development has favoured AIEs and emerging economies (China,
Malaysia)- those countries that have been able to benefit from trade and investment.
Trade – favoured those countries in strong trading blocs and disadvantaged non members
TNCs – investing in low-income economies to exploit cheap labour
(advantages/disadvantages)
Increased global inequality- inequality has increased between countries and within countriesthe rich are getting richer at a much faster rate- approx 32% of the world’s population lives in
poverty but poverty has been decreasing in emerging economies
Environment- All countries experience environmental problems because of economic growth.
Developing countries generally experience the more obvious problems because they want to
attract foreign investment and are willing to sacrifice the environment to achieve higher
national income.
Conclusion
Year 12 Economics- Topic Summary
Topic 2- Australia’s Place in the Global Economy
The focus of this topic is an examination of Australia’s place in the global economy and the
impact of changes in the global economy on Australia.
Australia’s trade and financial flows
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Trends/CAD/Capital and Financial account
BOP links
Debt trap
Net Foreign Liabilities and Foreign Debt
International competitiveness
Exchange Rates
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Flexible exchange rates/FOREX markets
Demand and supply factors
Appreciation and depreciation
Effects on economy
Role of the RBA
Free Trade and Protection
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Recent trends in Australia
Positives and negatives for individuals, firms and government
Australia’s Place in the Global Economy
Introduction
How is Australia part of the global economy?
Australia is part of the global economy through trade, finance, investment, labour and
technology. Australia has experienced a period of great structural change as it has reduced
protection, floated its exchange rate and encouraged foreign investment. As a result Australia
has become a more dynamic and competitive economy capable of adjusting to changes in
global markets. On the other hand it has also experienced structural U, a fluctuating CAD,
exchange rate instability and a growing Foreign Debt.
Body
CAD (goods and services)
Outline the components of the CAD = (X- M) Goods & Services + primary income +
secondary income
Explain how X-M has changed – increase in mining exports and relative fall in agriculture
and manufacturing
Change in direction of trade = more towards Asian markets and particularly China
Fall in protection from average tariff of 36% (1970) to 1.9 % (2012) and eventually zero.
As a result Australia is exporting more but also importing more causing a trade surplus X>M
from time to time. The CAD has reduced in recent years due to the mining boom and trade
surpluses. The future of the CAD is closely linked with exports to China.
CAD (net income)
CAD is financed by foreign capital inflow- FDI + Foreign savings. Foreign savings is
attracted by high Australian interest rates. This has created a debt-trap cycle for the CAD
(draw the cycle and explain)
Positives of foreign investment (debt and equity)-increased funds for Australians to borrow +
FDI creates extra employment and production. Negative consequences are profit and interest
repayments and debt trap. Australia’s foreign debt has grown from 45% GDP in 1990 to 65%
GDP 2014.
Consequences of a high CAD
Growth in foreign liabilities (debt + equity) and debt trap cycle. Exchange rate more volatile
and depreciation is more likely. CAD becomes a constraint on economic growth- government
can’t let the economy grow too quickly because imports will surge. Loss of international
confidence
Flexible exchange rate
Australia has a floating exchange rate. This has allowed foreign capital to flow freely into
Australia – increasing Australia’s net foreign liabilities. Australia’s exchange rate has
declined in value since being floated, however in recent years it has appreciated to around $1
US. From time to time the Australian currency has collapsed due to speculators selling large
quantities of AUD. In 2014 the AUD has stabilised due to foreign savers buying AUD due to
our relatively attractive domestic interest rates. It is important to have a stable exchange rate
so that international investors have confidence in the Australian economy.
Protection
Australia supports free trade and the WTO. It has reduced protection in order to restructure
the economy (1.9% average). This has forced Australian firms to be more export oriented and
more internationally competitive. It has caused structural unemployment as many low skilled
workers have lost their jobs. Australia has experienced a period of sustained economic growth
over the last 15 years as a result of structural change and globalization
Conclusion
Exchange Rates
Introduction
Definition- value of one country’s currency in terms of another country’s currency
Australia’s exchange rate was floated in 1983 – it is now determined by the forces of demand
and supply on FOREX markets (flexible exchange rate).
The AUD can appreciate or depreciate – generally stable in 2014.
Body
Demand and supply factors
The demand for AUD depends on overseas buyers wishing to buy AUD to purchase
Australian exports, invest in Australia etc. The supply of AUD depends on people selling
AUD to pay for imports, invest overseas, transfer income overseas etc…..
Draw demand and supply curves
Explain why the AUD appreciates and/or depreciates
An increase in demand for AUD or a decrease in the supply of AUD will cause an
appreciation of the AUD- draw diagrams to illustrate.
A decrease in demand for AUD or an increase in the supply of AUD will cause a depreciation
of the AUD- draw diagrams to illustrate.
Impacts of an appreciation
Negative:
Export prices should increase and import prices decrease – will probably cause an increase in
the CAD
Decrease in foreign investment due to increased price of AUD
Foreign income from overseas assets decrease
Foreign assets lose value
Overall- an appreciation has a negative impact on international competitiveness
Positive:
Lower inflation as purchasing power increases when imports are cheaper
Reduced value of Australian foreign debt for those who have borrowed in a foreign currency
+ reduced servicing costs on primary income component of CAD
Impacts of a depreciation (all the opposite)
Positives
Export prices should decrease and import prices increase – will probably cause an
improvement in BOGs and a fall in CAD
Increase in foreign investment due to decreased price of AUD
Foreign income from overseas assets increase
Foreign assets increase in value
Overall- depreciation has a positive impact on international competitiveness
Negatives:
Higher inflation as purchasing power decreases when imports are more expensive
Increased value of Australian foreign debt for those who have borrowed in a foreign currency
+ increased servicing costs on primary income component of CAD
Role of RBA and current trends
Direct and indirect intervention
Recent trends in AUD- stable in 2014 as global economy recovers
Conclusion
Year 12 Economics- Topic Summary
Topic 3 –Economic Issues
The focus of this topic is the nature, causes and consequences of the economic issues and
problems that can confront contemporary economies.
Economic Growth
 Aggregate demand
 Injections and leakages
 Multiplier
 Sources and effects
 Business cycle
Unemployment
 Trends and measurement
 Types
 Causes
 Natural rate (NAIRU)
 Economic and social costs
Inflation
 Trends and measurement
 Types
 Causes
 Phillip’s curve trade off
External Stability
 BOP and CAD
 Foreign debt
 Debt Trap
 Exchange rate
Distribution of income and wealth
 Lorenz curve and Gini coefficient
 Sources of income and wealth
 Reasons for inequality
 Economic and social costs/Economic benefits
Environmental Management
 ESD
 Private and social costs – diagram
 Free riders- public and private goods
 Issues – preservation, pollution, negative externalities, renewable v non –renewable
resources, carbon tax
Economic Objectives and Issues
Introduction
What are the objectives?
Economic growth, full employment, low inflation (internal balance)
External stability (CAD, Foreign Debt, exchange rate)
Environmental quality
Redistribution of income
Body
Expand on each objective by discussing the realistic targets for the govt
Economic growth = 3% - 4 %
Full employment = 4% (no cyclical unemployment – natural rate of unemployment)
Inflation = 2% - 3% RBA target
CAD = 5% GDP, Foreign Debt = 60% GDP, stable exchange rate
Environment = Ecological sustainable development
Redistribution of income = more even distribution (Lorenz curve/ Gini coefficient)
Possible conflict between objectives
Economic growth reduces cyclical unemployment but can cause demand inflation
(Phillips curve)
Economic growth can cause an increased demand for imports increasing the CAD. This in
turn will require more foreign savings to flow into Australia (debt-trap).
Economic growth requires extra resource use thus leading to the depletion of resources and
the creation of negative externalities.
Economic growth usually causes higher wages as unemployment falls. Skilled workers tend
to get the largest wage rises causing greater income inequality
Explain what has been happening in Australia and the role of macro and micro policies
Australia has experienced sustainable low inflationary economic growth over the last 15
years. Economic growth around 3.9%, inflation in the 2% - 3% range and falling
unemployment (from 11% to 4.9%)- successful internal balance. However, the GFC has
caused a slowdown in the domestic Australian economy with GDP falling to 1% growth in
2008/2009 and unemployment rising to 5.8%. Inflation fell to 1.6%.
External instability has been the major economic problem- CAD and foreign debt due to
globalisation (debt-trap problem). However, in 2013 the CAD has fallen due to lower
domestic demand for imports and continued demand by China and India for Australian
resources- Australia had a trade surpluses in recent months.
Environmental quality continues to deteriorate (salinity is a major problem – water and land)
as the economy grows. However, the Labor Govt signed the Kyoto protocol and was
committed to a carbon tax scheme to reduce CO2 emissions. However, the Liberal Govt does
not have the same commitment to reducing CO2 emissions.
Income inequality continues to increase due to a more deregulated labour market
Monetary policy – low inflation (2% - 3%) as the target has been successful. Investment has
been encouraged and the economy has grown.
Fiscal Policy has been effective in preventing a domestic recession but govt debt levels have
risen due to recent budget deficits.
Micro reform has improved efficiency causing domestic growth and assisting with
international competitiveness and lower inflation.
Conclusion
Distribution of Income & Wealth
Introduction
Definition of income and wealth…Australia has an uneven distribution of income and wealth.
Pattern is similar to most western advanced economies with inequality increasing as market
forces operate more freely in the global economy.
The government deliberately attempts to redistribute income via progressive income tax and
welfare payments (transfer payments).
Body
Explain how income inequality is measured
Discuss the Lorenz Curve and Gini coefficient (draw a Lorenz Curve) and refer to recent
statistics (poorest 40% earn 19% of income and richest 40% earn 63% of income after the
government has redistributed income). Explain how the Gini coefficient is calculated and
discuss the long term trend as Gini coefficient has increased from 0.29 in 1997 to 0.33 in
2013. Explain how the distribution of wealth is more unequal.
Reasons for income inequality
Discuss the sources of income and wealth and the role of age, gender, ethnicity, occupation
and location in determining income. The most important factor is education and skills because
they will play a major role in determining the occupation a person will have.
Costs and benefits of income inequality
Market based economies depend on the incentive effect. For most people high income is a
significant incentive. Due to the opportunity of earning higher incomes people will seek
education and training to improve skills, work harder and longer, be willing to relocate to
isolated regions (mining) and take risks as entrepreneurs.
On the other hand there are a number of economic costs associated with income inequality:
reduced overall utility and consumption, conspicuous consumption and increased welfare
costs. Many economists believe a more equal distribution of income increases economic
growth because low income earners have a higher MPC than high income earners.
There a number of social costs associated with income inequality including the emergence of
social classes and poverty
Government Policies
The Australian Government deliberately attempts to redistribute income by taxing high
incomes at high marginal tax rates (progressive income tax) and redistributing income to low
income earners via social welfare payments (transfer payments). This policy significantly
moves Australia’s Lorenz Curve to the left and decreases the Gini coefficient. Before the
government intervenes the poorest 20% of the population earn only 0.8% of total income and
the richest 20% earn 47% of total income. Compulsory superannuation has also been
introduced to provide low income earners with a source of wealth and income for retirement.
On the other hand, a number of other microeconomic reforms have tended to increase
inequality and benefitted high income earners: Enterprise bargaining has benefitted skilled
workers and as a result wages for skilled workers have increased at twice the rate of low
skilled workers. In order to assist low income earners the government has established an
annual safety net wage increase for workers not covered by enterprise agreements. Reducing
protection has had a major impact on many low skilled low income earners. Structural
unemployment has played a role in increasing long-term unemployment in rural Australia.
The introduction of the GST also had a significant impact on the purchasing power of low
income earners.
Conclusion
Environmental Management
Introduction
Explain the trade-off between economic growth and environmental quality. As economic
growth increases more scarce resources are used and more negative externalities are created.
This means governments are attempting to achieve ESD so that the environment is managed
effectively for future generations (intergenerational equity). This is a major issue in Australia
as indicated by the government’s commitment to the Kyoto Agreement and the introduction
of a carbon tax.
Body
ESD Principles
Discuss the government’s key ESD principles (especially…integrating economic and
environmental goals). Discuss negative externalities, the tragedy of commons and draw
demand and supply curves illustrating how prices increase when social costs are included in
market prices. It is important that you explain the concept of market failure. The market fails
to value the environment so the government must intervene to ensure resources are not
exhausted and the environment is preserved for future generations.
Environmental Issues
There are a number of environmental issues for the Australian Government to consider: a)
Preserving natural environments by restricting mining locations, controlling logging,
protecting native plant and animal species. b) Reducing pollution by reducing the use of
CFCs, recycling, improving water quality and reducing salinity in major rivers. c) Monitor
climate change by setting targets to reduce carbon emissions by introducing a carbon tax,
becoming less dependent on fossil fuels and changing land-use d) Reduce the depletion of
non-renewable natural resources by controlling commercial fishing, grazing and logging.
Government Policies
Bans, taxes and fines have often been used in the past to regulate the behaviour of business.
eg leaded petrol was initially taxed in order to reduce consumption and was ultimately banned
by the government. The government also imposes fines on firms when environmental laws are
broken.
The Labor Government signed the Kyoto Protocol in 2008 and has established a number of
medium-term and long-term carbon emission targets (reduce carbon emissions from
between 5%-25% by 2020 and by 80% by 2050). In 2011 the government moved towards a
market-based approach to carbon emissions by introducing a carbon tax of $23/tonne. The
aim is for firms to introduce methods of production which will reduce carbon emissions. In
2015 the government planned to introduce a ‘cap and trade’ emissions trading scheme. The
introduction of a carbon tax is a very significant policy change for the government. It means it
is trying to force the market to recognise there are economic advantages in not producing
carbon. However, the new Liberal Government plans to scrap the carbon tax. This
means Australia has no policy in place in relation to reducing CO2 emissions.
In this section it is important you explain how the Labor Government was committed to a
number of international agreements on a variety of issues…carbon emissions, commercial
fishing, biodiversity, CFCs, Ozone. However, we are yet to see any policy initiatives from
the new Liberal Government.
Conclusion
Year 12 Economics- Topic Summary
Topic 4 – Economic Policies and Management
This topic focuses on the aims and operation of economic policies in the Australian economy
and hypothetical situations.
Economic Objectives
 Internal Stability/balance and economic growth
 External Stability/balance
 Environment
 Income inequality
Fiscal Policy - Macroeconomic Policy (demand management)
 Budget outcome (deficit, surplus, balanced)
 Budget stance (expansionary, contractionary, neutral)
 Recent trends- Keynesian diagram
 Redistribution of income, reallocation of resources and stabilisation of business cycle
 Financing a deficit- crowding out
 Retiring a surplus
Monetary Policy- Macroeconomic Policy (demand management)
 Role MP- low inflation 2%-3% target
 MP purpose/goals
 Role of RBA in the implementation of MP (stance)
 Impact of interest rates on the economy
Microeconomic Policy
 Supply side Economics- aggregate supply curve
 Structural change
 Examples of MER – Labour market reform, Competition Policy, Trade and Industry
Policy, Deregulation, Tax Reform
 Positives and Negatives of MER
Prices and Incomes Policy
 Centralised v decentralised wage determination
 Current industrial system- Fair Work Australia
 Dispute resolution
 Education and Training
Limitations of policy
 Time lags
 Global economy
 Pressure groups
Policy responses to objectives
Macro Policies
Introduction
 What are Macroeconomic Policies?
Monetary Policy and Fiscal Policy are the two macro tools available to the government. These
policies can be used to regulate aggregate demand and production.
Monetary policy indirectly controls domestic interest rates and Fiscal Policy is the annual
Federal Budget- control government spending and taxation.
Body
 What is aggregate demand?
Y= C + I + G + (X-M)…Aggregate demand determines how much firms will produce (output
= GDP) and the quantity of resources firms require to produce goods and services (this will
determine employment). If aggregate demand increases, unemployment will fall and living
standards will rise- boom in the business cycle. A decrease in aggregate demand will cause a
slowdown in production and an increase in unemployment (draw the business cycle to
illustrate)
 Explain how Monetary Policy works
The RBA attempts to control the cash rate through buying and selling second hand CGS on
the official short-term money market.
Expansionary Monetary Policy
RBA buys CGS from financial institutions cash rate falls financial institutions have
increased liquidity interest rates fall  borrowing increases  aggregate demand increases
 production increases  demand for resources increases  unemployment falls. Excess
growth will cause demand inflation and a rise in the demand for imports
The RBA has maintained the Cash Rate at 2.5%) to counteract a tightening of Fiscal Policy.
Contractionary Monetary Policy
RBA sells CGS to financial institutions cash rate rises financial institutions have
decreased liquidity interest rates rise  borrowing decreases  aggregate demand slows
down  production slows down  demand for resources slows down  inflation decreases.
If interest rates are too high the economy could slow down too much and cyclical
unemployment could occur. There is a long time lag involved (12-18 months)
 Explain how Fiscal Policy works
Potentially can expand or contract the economy through discretionary changes in G or T in
the annual budget.
Expansionary Fiscal Policy (loose)
Government increases G and/or decreasing T increased expenditure  increases aggregate
demand  increases productionincrease demand for resources  unemployment falls.
Demand inflation could increase if the economy grows too quickly
Contractionary Fiscal Policy (tight)
Government decreases G and/or increases T decreased expenditure  slows down
aggregate demand  slows down production slows down demand for resources 
inflation falls.
Cyclical unemployment could increase if the economy slows down too much.
This year Fiscal Policy is mildly contractionary as the government attempts to reduce the size
of the budget deficit. In the long run the government aims to achieve fiscal balance over the
course of the business cycle.
Monetary Policy is continues to be expansionary with a record low cash rate of 2.5%. The
economy is showing signs of sustainable growth as private sector housing and business
investment increase.
Conclusion
Fiscal Policy
Introduction
 What is Fiscal Policy?
Fiscal Policy is a macroeconomic policy that can be used by the government to regulate
aggregate demand and production. Fiscal Policy is implemented through the government’s
annual budget. It involves the regulation of aggregate demand by the government changing its
level of planned spending (G) and planned tax revenue (T).
Fiscal policy has the power to redistribute income, reallocate resources and regulate (stabilize)
the economy.
Body
 What is aggregate demand?
Y= C + I + G + (X-M) Aggregate demand determines how much firms will produce (output =
GDP) and the quantity of resources firms require to produce goods and services (this will
determine employment). If aggregate demand increases unemployment will fall and living
standards will rise- boom in the business cycle but demand inflation may occur. If aggregate
demand decreases the economy could fall into a recession and unemployment would increase
(draw the business cycle to illustrate)- mention the multiplier effect
 Explain how Fiscal Policy works
Potentially Fiscal Policy can expand or contract the economy through discretionary changes
in G or T in the annual budget. This means the government is deliberately planning to
increase aggregate demand to cause economic growth and reduce unemployment. On the
other hand the government may want to deliberately slow down the growth of aggregate
demand and thus the growth rate of the economy.
 Expansionary Fiscal Policy stance (Keynesian Diagram – deflationary gap)
Government increases G and/or decreasing T increased expenditure  increases aggregate
demand  increases productionincrease demand for resources  unemployment falls. In
this case the budget deficit would increase or the budget surplus would decrease. The budget
outcome depends on the discretionary stance of the government and the previous budget
outcome.
Demand inflation could increase if the economy grows too quickly. An expansionary Fiscal
Policy stance would be implemented if the economy was in recession and Monetary Policy
had been ineffective in causing the economy to grow.
 Contractionary Fiscal Policy stance
Government decreases G and/or increases T  decreasing expenditure  decreasing the
growth in aggregate demand  slows down the growth of productionslows down the
growth in demand for resources  unemployment increases. In this case the budget deficit
would decrease or the budget surplus would increase. The budget outcome depends on the
discretionary stance of the government and the previous budget outcome.
In recent years Fiscal Policy has become an important tool to increase economic growth. The
government gave income tax cuts to increase demand and it increased government spending
on infrastructure to directly create jobs – it also gave tax payers a $900 cash bonus. This
increased the size of the budget deficit significantly. The 2013/2014 budget will have a
smaller deficit as the government attempts to consolidate its fiscal position. The government
will plan for surpluses in the future in order to repay the debt caused by budget deficits in
recent years. The government’s aim is to balance the budget over the course of the business
cycle.
Conclusion
Monetary Policy
Introduction
 What is Monetary Policy?
Monetary Policy has been the main macroeconomic policy used by the government to
regulate aggregate demand and production over the last 10 years. Monetary policy indirectly
controls domestic interest rates through the official cash rate. Interest rates in turn will
influence the level of borrowing, spending and production in the economy. The main aim of
Monetary Policy has been to control inflation- inflation target is 2%-3%
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 What is aggregate demand?
Y= C + I + G + (X-M) Aggregate Demand determines how much firms will produce (output =
GDP) and the quantity of resources firms require to produce goods and services (this will
determine employment). If aggregate demand increases unemployment will fall and living
standards will rise- boom in the business cycle. Explain what happens if the economy goes
into a recession (draw the business cycle to illustrate)
 Explain how Monetary Policy works
The RBA attempts to control the cash rate through buying and selling second hand CGS on
the official short-term money market.
Expansionary Monetary Policy (loose)
RBA buys CGS from financial institutions cash rate falls financial institutions have
increased liquidity interest rates fall  borrowing increases  aggregate demand increases
 production increases  demand for resources increases  unemployment falls. Excess
growth will cause demand inflation and a rise in the demand for imports
Draw a Keynesian diagram to show an increase in aggregate demand and economic growth to
a higher GDP equilibrium
Contractionary Monetary Policy (tight)
RBA sells CGS to financial institutions  cash rate increases  financial institutions have
less liquidity  interest rates rise  borrowing decreases  aggregate demand slows down
 production slows demand for resources slows  inflation falls. (unemployment may
also increase).
Explain that although Monetary Policy could change from month to month (easy and quick to
implement) the time lag between implementation and the final effect is very long (12-18
months).
The RBA maintains a low cash rate of 2.5% due to a tighter fiscal stance and uncertainty
about the global economy. If demand inflation becomes a problem the RBA will increase the
cash rate. Monetary Policy was the main swing arm of the Government over the last 10 years.
However, Fiscal Policy has played a significant role in demand management in recent years
because the economy required quick and effective stimulus.
Micro economic reform has assisted macroeconomic policies by reducing supply-side
inflation.
Conclusion
Microeconomic Reform
Introduction
What is microeconomic reform?
Policies designed to improve the efficiency of individual sectors/industries in the economyreferred to as supply side economics. Micro has been an extremely important component of
the policy mix (Monetary Policy and Fiscal Policy are demand management policies and
Microeconomic policies attempt to improve the efficiency of supply). Micro policies attempt
to control inflation and improve Australia’s international competitiveness.
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 Outline microeconomic theory
Shift the supply curve to the right (draw a demand and supply diagram). This decreases prices
and causes an expansion of demand. Inflation will fall and the economy will grow.
Microeconomic reform attempts to increase efficiency- allocative efficiency, dynamic
efficiency and technical efficiency (briefly explain each). Structural change is a necessary
aspect of micro reform.
 Examples of micro reform
Deregulation – agricultural markets and financial markets- this has increased the efficiency
of markets- interest rates are lower and financial institutions are more competitive.
Public Trading Enterprises – corporatisation and privatisation. The public sector was
generally considered to be inefficient in Australia. Privatisation has been used to increase
efficiency and provide the government with funds to repay debt.
National Competition Policy – include the Trade Practices Act, the ACCC and Hilmer’s
recommendations. Increased competition generally leads to increased efficiency and lower
prices.
Taxation Reform - GST has improved allocative efficiency
Industry Policy – Lowering protection has caused lots of restructuring in the economy.
Strategic export industries are now helped.
Labour Market Policy – Enterprise bargaining has contributed significantly to improving
labour market productivity. Probably the most important microeconomic reform
 Advantages and Disadvantages of Microeconomic reformLong term benefits of microeconomic reform and structural change- increased efficiency and
productivity, lower inflation, improved international competitiveness, economic growth,
lower unemployment, increase exports
Short term costs of higher structural unemployment, higher demand for imports, increased
CAD, growing foreign debt, loss of inefficient industries
Micro economic reform has played a key role in improving the efficiency of the economy and
promoting low inflationary sustainable economic growth. A key issue for the government is
how to improve efficiency further to allow for improvements in productivity. Many
economists believe the taxation system needs significant reform in the future to promote
investment and improve the incentive effect for workers.
Conclusion
Labour Market Policies
Introduction
What is wage determination?
Australia moved towards a more deregulated and flexible labour market with the introduction
of enterprise agreements over 15 years ago. Wage determination in Australia is a complex
combination of state and federal legislation regulating formal (industrial law) and informal
(common law) wage agreements. In addition a proportion of workers depend on wage
increases based on safety net wage adjustments determined by a centralise commission (Fair
Work Australia).
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Outline the key aspects of wage determination in Australia
Formal agreement: industrial relations system is based on enterprise agreements (collective
bargaining 43%) based on productivity trade-offs subject to BOOT and award adjustments
determined by Fair Work Australia (15%). Informal agreements: common law contracts
usually individually based (37%).National Employment Standards (10 guaranteed
employment conditions apply to all workers except self-employed. Minimum wage increases
are determined by Fair Work Australia (3% rise in 2014 to $640/wk). Australia has
experienced labour productivity growth, economic growth, lower inflation and falling
unemployment since moving from a centralised wage determination system to a decentralised
wage determination system. Industrial disputes and union membership have declined
significantly over the last 15 years. Income inequality has increased as award wage increases
have lagged behind enterprise agreement wage increases.
Outline the key aspects of a decentralised wage determination
Positives: Resources are more efficiently allocated and structural change is promoted as
market forces determine wages and the demand for labour. The labour market becomes more
flexible as workers and employers have the opportunity to negotiate wages and working
conditions. Cost push inflation pressure is reduced as wage increases are productivity based.
Negatives: The government loses a potential economic tool to control aggregate demand.
Income inequality will increase as wages reflect contribution to the economy rather than the
decision of a tribunal. Wage demands could escalate as workers gain more power in the
labour market.
Fair Work Australia
FWA plays a key role in the industrial relations system as a result of the Fair Work Act 2009:
determining minimum wage increases (safety net), overseeing awards and enterprise
agreements especially in relation to National Employment Standards and resolving disputes
through conciliation and arbitration. A significant aspect of the Fair Work Act was to create
Fair Work Australia as a statutory body to oversee the rights of workers in a decentralised
wages system.
Conclusion