Aggregate Demand Policies & Domestic Economic Stability – Vocabulary Review

Vocabulary flashcards covering key terms from the lecture on aggregate demand management policies, fiscal and monetary tools, and their role in stabilising Australia’s economy.

Aggregate Demand (AD) Management Policy

Government or RBA measures aimed at counter-cyclically varying total spending on Australian-made goods and services to stabilise the business cycle.

Budgetary (Fiscal) Policy

The Federal Treasurer’s deliberate changes to government revenues and expenditures to influence aggregate demand and achieve macroeconomic goals.

Monetary Policy

The RBA’s manipulation of the cash rate to influence other interest rates, thereby regulating aggregate demand and economic activity.

Business Cycle Stabilisation

The attempt to smooth booms and troughs in economic activity to protect living standards and macroeconomic stability.

Domestic Macroeconomic Goals

The national objectives of strong & sustainable growth, full employment and low & stable inflation.

Strong and Sustainable Economic Growth

The fastest rate of real GDP growth consistent with other economic and environmental goals.

Full Employment

The lowest unemployment rate achievable without accelerating inflation; no cyclical unemployment and at NAIRU.

Low and Stable Inflation (Price Stability)

CPI inflation of 2–3 % per annum on average over time.

NAIRU

Non-accelerating inflation rate of unemployment; the unemployment rate consistent with stable inflation.

Government Receipts (Revenue)

Money collected by the Federal Government, mainly taxes, that finances its spending and is a leakage from the circular flow.

Direct Taxation

Taxes levied on income, such as personal income tax and company tax.

Indirect Taxation

Taxes levied on spending or production, added to prices at sale, e.g., GST and excise.

Progressive Tax

A tax whose rate rises as income rises, e.g., Australia’s personal income tax.

Regressive Tax

A tax whose effective rate is higher for lower-income earners, e.g., GST or tobacco excise.

Proportional Tax

A tax with a constant rate regardless of income, e.g., the standard company tax rate.

Government Business Revenue

Profits earned from publicly owned enterprises such as Australia Post.

Asset Sale Proceeds

Funds the government receives from privatising assets like Telstra or Medibank.

Government Outlays (Expenses)

Federal spending on Australian goods, services and transfers; an injection into the circular flow.

Current Expenditure (G1)

Ongoing operational spending such as public-sector wages and departmental running costs.

Capital Expenditure (G2)

Spending on long-lived infrastructure that expands productive capacity, e.g., roads, ports, schools.

Transfer Payments

Government payments like welfare benefits that provide income support but are not counted as G in GDP until spent.

Budget Outcome

The difference between estimated government revenues and expenses for a financial year.

Balanced Budget

Situation where government revenues equal expenses.

Budget Deficit

Situation where expenses exceed revenues in a given year.

Budget Surplus

Situation where revenues exceed expenses in a given year.

Headline Budget Balance

Budget outcome including all cash flows, such as asset sales and investment earnings.

Underlying Cash Balance

Headline balance adjusted for volatile one-offs, giving a clearer view of the fiscal impact on the economy.

Financing a Deficit

Methods used to fund a budget shortfall, such as domestic borrowing, overseas borrowing or drawing on RBA deposits.

Borrowing Overseas

Selling government bonds to foreign investors; can be cheaper but adds to net foreign debt.

Borrowing Domestically

Issuing bonds to Australian investors, which can crowd out private borrowing by lifting interest rates.

Borrowing from the RBA

Using or creating deposits at the central bank to finance deficits; highly inflationary if bonds are sold to the RBA.

Crowding Out

Rise in government borrowing that pushes up interest rates and squeezes private sector spending.

Crowding In

Fall in government borrowing that lowers interest rates and stimulates private sector credit demand.

Public (Government) Debt

Total accumulated borrowings from past deficits still owed by the government.

Automatic Stabilisers

Budget components (tax receipts and welfare outlays) that change automatically with economic conditions to moderate the business cycle.

Discretionary Stabilisers

Deliberate policy changes to taxes or spending designed to influence aggregate demand.

Structural Budget Balance

The part of the budget outcome that remains after removing the cyclical influence of automatic stabilisers.

Budget Stance

Overall intended impact of the budget on aggregate demand—expansionary, contractionary or neutral.

Reserve Bank of Australia (RBA)

Australia’s central bank responsible for monetary policy, issuing currency and acting as banker to government and banks.

Cash Rate

The interest rate on overnight loans between banks in the short-term money market targeted by the RBA.

Policy Interest Rate Corridor

The RBA’s system of deposit and lending rates that keeps the actual cash rate close to the target.

Exchange Settlement Account (ESA)

Account each bank holds at the RBA used to settle interbank transactions daily.

Short-Term (Overnight) Money Market

Market where banks lend and borrow funds overnight, determining the cash rate.

Open Market Operations (OMO)

RBA buying or selling government securities to manage the supply of cash and keep the cash rate at target.

Monetary Policy Stance (Expansionary)

Cash rate set below neutral to encourage borrowing and increase aggregate demand.

Monetary Policy Stance (Contractionary)

Cash rate set above neutral to discourage borrowing and reduce aggregate demand.

Neutral Monetary Policy

Cash rate set at a level thought neither to stimulate nor restrain economic activity (around 2–3 % in Australia).

Transmission Mechanism

The channels through which changes in interest rates influence aggregate demand.

Savings & Investment Channel

Higher rates raise saving incentives and borrowing costs, reducing consumption and investment spending.

Cash-Flow Channel

Rate changes alter borrowers’ disposable income by changing loan repayment amounts.

Exchange-Rate Channel

Interest rate changes influence capital flows and the AUD, affecting export and import demand.

Asset Price & Wealth Channel

Interest rates affect asset valuations (e.g., housing), altering household wealth and spending.

Unconventional Monetary Policy

Central-bank actions other than cash-rate changes, used when rates are near zero.

Quantitative Easing (QE)

RBA purchases of large quantities of bonds to inject liquidity and lower medium-long-term interest rates.

Term Funding Facility (TFF)

Low-cost funding provided by the RBA to banks to support credit supply during the pandemic.

Neutral Cash Rate

Estimate of the cash rate consistent with full employment and stable inflation, currently around 3 %.

Inflation Targeting

RBA strategy of aiming for 2–3 % CPI inflation over time to anchor expectations.

Crowding Out vs. Monetary Policy Conflict

Deficit financing can lift interest rates and counteract the RBA’s efforts to stimulate or restrain the economy.

Expansionary Bias

Tendency for elected governments to favour deficits and spending increases due to political pressures.

Implementation Lag (Monetary Policy)

Short time between an RBA decision and the cash-rate change taking effect.

Impact Lag (Monetary Policy)

Lengthy period—up to about three years—before rate changes fully influence activity and inflation.

Time Lags (Budgetary Policy)

Delays in recognising issues, legislating measures and rolling out projects that can weaken counter-cyclical effectiveness.

Business Cycle

The alternating periods of economic expansions and contractions around a long-term growth trend.

Aggregate Supply Policy

Government measures aimed at increasing productive capacity and the ability of firms to produce goods and services.

Circular Flow of Income Model

Framework showing flows of income, spending and production between households, firms and government.

Leakage

Money leaving the expenditure stream, e.g., taxes, savings or imports.

Injection

Money entering the expenditure stream, e.g., government spending, investment or exports.

Cost-of-Living Measures (2024-25 Budget)

Discretionary initiatives such as $300 energy rebates and redesigned income-tax cuts aimed at household relief.

QE Amount 2020-22

Approx. $330 billion of government bonds purchased by the RBA during the pandemic.

Policy Trade-Off

Sacrificing one macro goal to achieve another, e.g., higher unemployment to reduce inflation via contractionary monetary policy.