Key Economic Knowledge

Economic Cycle Phases

Boom (near max GDP, low unemployment), Contraction (falling GDP/inflation, rising unemployment), Recovery (rising GDP/inflation/spending), Trough (lowest GDP, high unemployment, weak spending).

Expansionary Stance

Fiscal: ↑G or ↓T. Monetary: ↓CR. Results in ↑AD, ↑GDP, and ↓unemployment.

Contractionary Stance

Fiscal: ↓G or ↑T. Monetary: ↑CR. Results in ↓AD and ↓inflation.

Neutral Stance

Maintains stable inflation and low unemployment.

Macroeconomic Policy

Demand-side policy that manages aggregate demand (AD) in the short run.

Microeconomic Reform

Supply-side policy that raises long-run aggregate supply (LRAS) in the long run.

Non-Discretionary Policy

Automatic stabilisers (e.g., progressive tax, welfare payments) that automatically reduce economic fluctuations.

Discretionary Policy

Deliberate government changes to taxation or spending, such as infrastructure projects or tax cuts.

Monetary Policy

Management of the cash rate by the RBA to influence economic activity.

Interest Rate Transmission Channel

Cash rate rises → borrowing costs rise → consumption/investment fall → AD falls → inflation falls.

Limitations of Monetary Policy

Long outside lag, blunt instrument, cannot directly increase LRAS, and extended low rates can encourage asset bubbles.

Fiscal Policy

Use of government spending (G) and taxation (T) to influence economic activity.

Budget Balance Definitions

Surplus (G < T), Deficit (G > T), Balanced (G = T).

Structural vs. Cyclical Deficit

Structural is a long-term imbalance existing even at full capacity; cyclical is temporary and caused by an economic downturn.

Direct vs. Indirect Taxes

Direct taxes cannot be shifted (e.g., income tax); indirect taxes are passed on to consumers (e.g., GST, excise).

Causes of a Budget Deficit

Ageing population, NDIS growth, natural disaster spending, and falling revenue from tax cuts or downturns.

Crowding Out

When government borrowing causes interest rates to rise, leading to a fall in private investment.

Opportunity Cost

The next best alternative forgone when a decision is made.

Microeconomic Policy

Raises productivity, efficiency, and competitiveness, shifting LRAS right and the PPF outward.

Aggregate Demand (AD)

Total spending in the economy, calculated as C + I + G + (X - M).

Aggregate Supply (AS)

Total output firms are willing to supply at different price levels.

Inflation

A sustained increase in the general price level, driven by demand-pull, cost-push, or imported factors.

Taxation Types

Progressive (higher income = higher tax %), Proportional (same % for everyone), Regressive (lower income = higher proportion taxed).

Unemployment Types

Frictional (job searching), structural (skills mismatch), cyclical (downturns), seasonal (calendar fluctuations), and hidden (discouraged workers).

Multiplier (MPW)

Total of MPS, MPT, and MPM. Higher leakages result in a smaller multiplier and slower growth.

Paradox of Saving

If everyone saves more, aggregate demand falls, output falls, and total savings actually fall.

Productive Efficiency

Producing goods and services at the lowest possible cost.

Allocative Efficiency

Producing goods and services to match society's needs and wants.

Dynamic Efficiency

Improving productivity through innovation, technology, and R+D.

Key Economic Trade-offs

Growth vs. inflation, inflation vs. unemployment, growth vs. environment, equity vs. incentives, and growth vs. external stability.