Understanding Fiscal and Monetary Policy in Economics

Fiscal Policy

The way governments manage taxation and spending in order to improve economic outcomes.

Expansionary Fiscal Policy

A type of fiscal policy that stimulates demand by increasing government spending or cutting taxes.

Contractionary Fiscal Policy

A type of fiscal policy that reduces demand by decreasing government spending or raising taxes.

Aggregate Demand

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Aggregate Supply

The total supply of goods and services that firms in an economy plan on selling during a specific time period.

Demand Side Focused

Fiscal policies aimed at increasing demand in the economy.

Supply Side Focused

Fiscal policies aimed at increasing supply in the economy.

Corporate Taxes

Taxes imposed on the income or profit of corporations.

Subsidies

Financial assistance granted by the government to promote economic activity.

Deregulation

The reduction or elimination of government rules controlling how businesses can operate.

Economic Performance Indicators

Metrics used to assess the economic performance of a country, such as GDP, inflation, and unemployment.

GDP

Gross Domestic Product, a measure of the economic performance of a country, representing the total value of all goods and services produced over a specific time period.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Unemployment

The situation when individuals who are capable of working are unable to find a job.

Tax Cuts

Reductions in the amount of tax that individuals or businesses must pay.

Energy Bill Relief Fund

A program initiated by the Australian Government to provide electricity bill relief for eligible households and small businesses.

Instant Asset Write Off

A tax incentive allowing small businesses to deduct the full cost of eligible assets costing less than a specified amount.

Labor's Tax Cuts

A series of tax reductions implemented by the Albanese Government aimed at providing financial relief to Australian taxpayers.

Economic Outcomes

The results of government policies on the economy, including growth, employment, and inflation rates.

Government Intervention

The involvement of the government in the economy to influence economic outcomes.

Conservatives

Political groups that typically advocate for smaller government intervention and market self-correction.

Progressives

Political groups that generally support more government intervention to correct market failures and support the economy.

Monetary Policy

Monetary policy is about the setting of the cash rate, or interest rates, to achieve economic growth, full employment and primarily, to control inflation.

Reserve Bank of Australia (RBA)

Monetary policy in Australia is set by the Reserve Bank of Australia or the RBA.

Expansionary Monetary Policy

Where the RBA lowers the official interest rate to increase people's borrowing power and lower mortgage repayments, thus increasing the disposable income of consumers and businesses.

Contractionary Monetary Policy

Where the RBA increases the official interest rate, reducing borrowing power and making mortgages harder to repay, thus reducing the disposable income of consumers and businesses.

Target Inflation

The RBA has adopted a target range of 2-3% per annum in headline inflation since 1993.

Interest Rate Changes

The RBA changes interest rates when it believes that the economy either needs to slow down due to rising inflation, or when it believes the economy requires stimulus as inflation is too low, growth is too low, or unemployment is too high.

Independent Central Bank

The RBA was set up as an independent body with the only goal being to manage inflation, taking potential blame for household pain away from the government.

Economic Growth

Economic growth refers to an increase in the production of goods and services in an economy over a period of time.

Full Employment

Full employment is the condition in which all available labor resources are being used in the most efficient way possible.

Disposable Income

Disposable income is the amount of money that households have available for spending and saving after income taxes have been accounted for.

Mortgage Repayments

Mortgage repayments are the regular payments made by a borrower to a lender to pay back a loan secured against a property.

Economic Stimulus

Economic stimulus refers to measures taken by a government or central bank to encourage economic growth, often through increased spending or lower interest rates.

Interest Rate

An interest rate is the amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.

Headline Inflation

Headline inflation is the total inflation in the economy, including all goods and services.

Economic Slowdown

An economic slowdown is a period of reduced economic activity, often characterized by declining GDP and increased unemployment.

Rate Cuts

Rate cuts refer to the reduction of interest rates by a central bank to stimulate economic activity.