Fiscal and Monetary Policy

Flashcards on Fiscal and Monetary Policy

Fiscal Policy

The use of the Australian government budget to achieve the macroeconomic objectives of full employment and high and sustained economic growth

Sources of Australian Government Budget Revenue

Taxes on individuals, taxes on companies, indirect taxes, and non-tax revenue

Categories of Australian Government Budget Expenses

Transfer payments, expenditure on goods and services, debt interest, and other payments

Fiscal Stimulus

An increase in government expenses or a decrease in tax revenue to boost real GDP and create or save jobs

Crowding Out Effect

Government borrowing to finance a deficit reduces the amount of loanable funds available for private investment

Supply-Side Effects of Fiscal Policy

Effects of fiscal policy on potential GDP, including policies that increase aggregate supply to achieve long-run growth in real output, full employment, and a lower inflation level

Potential GDP Determinants

Full-employment quantity of labour, quantity of capital, and state of technology, as well as fiscal policies

Monetary Policy Objectives (Australia)

Stability of the currency of Australia, maintenance of full employment in Australia, and the economic prosperity and welfare of the people of Australia

Inflation Target (Australia)

2 and 3 per cent, on average, over the business cycle

Monetary Policy Transmission - Fighting Recession

RBA buys Commonwealth Government Securities (CGS) from banks to stimulate the economy, increasing banks' reserve supply and lowering the cash rate

Money Multiplier (K)

Total Deposits created / Initial Deposit, also expressed as K = 1 / R, where R is the reserve ratio

Money Market Equilibrium

Money Supply (MS) is vertical because the quantity of money is fixed by the RBA, Money Demand (MD) is downward sloping

Relationship between Asset Price and Interest Rate

Inverse; when asset price rises, interest rate drops

Monetary Policy Transmission - Fighting Inflation

RBA sells Commonwealth Government Securities (CGS) in the financial markets to banks, decreasing banks' reserve supply and increasing the cash rate

Liquidity Trap

A situation in which the central bank’s efforts to stimulate spending fail because people hoard cash instead