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Monetary policy

The process by which the RBA manages the money supply and interest rates to influence economic activity, inflation and employment

Official Cash rate

- Key tool in monetary policy

- The interest rate set by the RBA that influences all other interest rates in the economy, including those on loans, mortgages and savings

Budgetary/fiscal policy

Decisions made by the Australian government regarding how it collects and spends money to influence the economy

Effects of unemployment

-Deteriorating living standard

-Material living standards: tangible goods lose access, non-material: can't afford services -> disconnected socially, - social status

-Decreased national production:

-Changed government budget position: to support

5 main types of unemployment

CHESS WITHOUT THE E

Cylical

Hardcore

Frictional

Structural

Seasonal

Cyclical unemployment

Occurs when there are fluctuations in the business cycle, specifically during economic downturns or recessions.

Impact of cyclical employment hint: happens during boom or recession

The level of spending in the economy falls, there will be reduced production and reduced need for labour, reduced income

Hardcore unemployment

People who face significant barriers to finding work due to factors beyond their control -> severe mental or physical disability or war

Frictional unemployment

Occurs when people are unemployed between finishing one job and starting another - common in building trades and some areas or rural industry

Seasonal unemployment

Results from the termination of jobs at the same time each year due to the regular change in seasons e.g fruit picking, waterslide jobs

Structural unemployment

Occurs because of changes in the way goods and services are produced.

This happens when: production methods change, when skills are outdated and not transferrable to new production methods, introduction of new technology, outsourcing in another country

Outsourcing

when a business hires another company (often in a different country) to do work that was once done in-house.

What is the government goal for unemployment

To maintain the rate of unemployment at about 5% of the workforce

Unemployment

A situation when people who are willing and able to work are unable to find unemployment

Economic growth

Occurs when an economy increases their volume of goods and services produced

GDP

Gross domestic product:

Total market value of all final goods and services produced by a country over a period

AD

Aggregate demand: The total demand for all finished goods/ services produced in an economy. Components are: consumption, investment, government spending/investment, exports/imports

Factors that influence AD

Consumer confidence

Business confidence

Interest rates

Overseas rates of economic growth

Household disposable income

Company tax: Flat tax of 30% levied on company profits

Target for economic growth

3.4%

What happens if economic growth is below 3.4%

There is slow growth, the economy is not keeping up with demand

What happens if economic growth is above 3.4%

The growth is too high, the economy is growing too quickly and is not sustainable

Two limitations to GDP as an accurate measure of growth

Does not include non-market production

Does not consider the impact of production on the environment

GDP involves some "guestimates" of production

CPI

Consumer price index:

Measures the changes in price of a "basket" of goods and services consumed by the average household. It is measured every quarter by the A.B.S

A.B.S

Australian bureau of statisics

Demand inflation

When demand is far greater than the goods/services available or being produced, it leads to price increase

Higher demand -> higher prices

Conditions/factors that lead to demand inflation

An increase in consumer optimism about the future

An increase in business confidence

An increase in income

An increase in our exports

How does an increase in consumer optimism about the future lead to demand inflation

Consumers are encouraged/more inclined to spend more money because..

-they feel confident in their future

-they feel they don't need to save

How does an increase in business confidence lead to demand inflation

This can cause business to spend and invest in new assets, hire more employees or replace old equipment

How does an increase in income lead to demand inflation

If consumers have a higher income, either through wage increases determined by the government or through a reduction in income tax imposed by the government, they are more likely to spend more on goods and services

How does an increase in our exports lead to demand inflation

If the economies of our major trading partners are performing well and they are experiencing good economic growth, theyy may increase their demand for our goods and services

Cost inflation

When production costs increase, producers and suppliers may choose to pass on this increased cost to consumers in the form of higher prices.

Supply-side factors that cause cost inflation:

An increase in wages paid to employees

An increase in interest rates

An increase in the cost of raw materials

Australia's trading partners experiencing a period of inflation

How does an increase in wages paid to employees cause cost inflation

Rising wages for a producer represent a large cost increase, which is then passed on to consumers

How does an increase in interest rates cause cost inflation

This raises the producer's cost of finance and borrowing. These costs are usually passed on to consumers

How does an increase in the cost of raw materials cause cost inflation

One-off supply side shocks because of a one-off event or shortage can cause this

How does Australia's trading partners experiencing a period of inflation cause cost inflation

-Many component parts are imported to Australia.

-So if our trading partners are experiencing inflation, the cost of goods and materials they export to us may be passed on to Australian producers and suppliers.

-This means our cost of production is higher, so the final cost for consumers will be higher

Effects of inflation

Causes local producers to lose out to overseas competitors

Undermines economic growth

Changes the allocation of resources

Affects income distribution

Allocation of resources

How money and resources are used or shared across an economy

Explain local producers to lose out to overseas competitors as an effect of inflation

-Inflation raises the cost of production, so goods and services prices go up

-Business struggle to compete with lower overseas prices

-So business may shut down because overseas prices are cheaper so people will buy from them instead

-But Australian businesses can't afford to lower their prices due to such high cost of production so they "lose"

Explain undermines economic growth as an effect of inflation

Consumers stop spending and producers stop investing in productive assets when prices are rising, negatively affecting rate of economic growth

Explain changes the allocation of resources as an effect of inflation

people with excess income invest in unproductive resources (shares and property) instead of productive that generates goods and services, this money goes into resources that only produce an income for those wealthy enough to invest

What are the causes of increased economic performance

Foreign investments, debt levels, employment

3 economic indicators

Inflation, unemployment, economic growth: GDP

Microeconomics

studies the economic behavior of individuals, households, and businesses, focusing on decisions about resource allocation and prices.

Macroeconomics,

Examines the economy as a whole, looking at aggregate variables like national income, inflation, and unemployment

When the economy expands

production increases, unemployment decreases, wages increase, consumer spending increases, prices increase

How does production increase when the economy expands

Businesses produce more goods and services (output)

How does unemployment decrease when the economy expands

Fewer people are out of work as businesses need more workers to produce more output

How do waged increase when the economy expands

Because businesses are doing well, they need to attract and keep workers by offering higher wages

How does consumer spending increase when the economy expands

people spend more because they are earning higher wages

how do prices increase when the economy expands

prices increase as consumers spend more this is known as inflation

when the economy contracts…

production decreases, unemployment increases, wages decrease, consumer spending decreases, prices decrease

how does production decrease when the economy contracrs

businesses produce fewer goods and services (output)

how does unemployment increase when the economy contracts

more people are out of work, as businesses need fewer workers

how do wages decrease when the economy contracts

because businesses are doing less well, they can attract enough workers at lower wages

how does consumer spending decrease when the economy contracts

people spend less because they are earning lower wages

how do prices decrease when the economy contracts

prices decrease as consumers spend less this is known as deflation

what are labels on the business cycle

output and time , peak, trough, peak, expansion, contraction, expansion