Macroeconomic Policy and Economic Objectives (Lecture Notes)

Vocabulary flashcards covering key terms and definitions from the lecture notes on macroeconomic policy, objectives, and related concepts.

Economic growth

An increase in the volume of goods and services produced in an economy; leads to higher incomes, employment opportunities, tax revenue, and a higher material standard of living; usually achieved through sustainable development.

Material standard of living

A person’s wealth level and ability to satisfy desires for goods and services over time.

Quality of life

The combination of material and non-material aspects of life that improve satisfaction (e.g., health, fairness, opportunity, independence, social trust, access to public facilities); usually achieved through sustainable development.

Full employment

The lowest unemployment rate at which inflation is not accelerating; cycle unemployment is near zero (NAIRU concept).

NAIRU

Non-accelerating inflation rate of unemployment; the unemployment rate at which inflation does not accelerate.

Price stability

Low, stable inflation that supports confidence, planning, and better resource allocation.

External stability

A country’s ability to meet financial obligations and maintain confidence of international creditors; supported by a stable exchange rate, a sustainable current account deficit, and sustainable net foreign liabilities.

Current Account Deficit (CAD)

A deficit in the current account; sustainable CAD is generally considered <5% of GDP.

Net foreign liabilities

Total foreign liabilities of a country minus its foreign assets; a large stock can be a crowding risk if not financed.

Environmental sustainability

Meeting current needs without compromising future generations’ ability to meet theirs; achieved through protecting nature and setting limits on economic activity.

Distribution of income

Equitable distribution of income; achieved through progressive taxation and welfare; excessive inequality erodes social trust and innovation if too high or too low.

Progressive taxation

Tax rates increase as income increases, aimed at reducing inequality.

Welfare payments

Government transfers to individuals to assist those in need; part of income distribution policies.

Inequality

Unequal distribution of income or wealth; can affect social trust and incentives.

Expansionary stance

Macroeconomic policy that adds to aggregate demand (e.g., higher spending or lower taxes) to stimulate growth.

Contractionary stance

Macroeconomic policy that subtracts from aggregate demand to cool an overheating economy.

Countercyclical policy

Policies designed to smooth the business cycle—expand in recessions, contract in booms.

Fiscal policy

Federal government use of spending and taxation to influence aggregate demand and economic activity.

Net spending (G−T)

Government spending minus tax revenue; determines fiscal stance.

Budget surplus

When government revenue exceeds spending (T > G).

Budget deficit

When government spending exceeds revenue (G > T).

Budget balance

When government spending equals taxation (G = T).

Automatic stabilisers

Cyclical budget changes that occur automatically with the business cycle, e.g., tax collections and welfare payments.

Monetary policy

Central bank actions to influence the money supply and interest rates to affect aggregate demand.

Reserve Bank of Australia (RBA)

Australia’s central bank responsible for monetary policy and financial stability.

Inflation targeting

A monetary policy framework aimed at achieving a specified inflation rate or range.

Policy interest rate corridor

The upper and lower bounds within which the central bank guides the cash rate through policy actions.

Cash rate

Overnight interest rate targeted by the central bank; a key driver of broader interest rates in the economy.

Open Market Operations (OMOs)

Central bank purchases or sales of securities to influence the money supply and achieve the target cash rate.

Government bonds

Debt securities issued to finance deficits; traded in primary and secondary markets.

Repos (repurchase agreements)

A way for the central bank to drain or add liquidity by lending/receiving back securities and reserves.

Reverse repos

A mechanism where the central bank lends cash and receives securities in exchange, increasing money supply.

Liquidity trap

When policy rates are near zero and conventional measures are ineffective at stimulating demand.

Quantitative easing (QE)

Unconventional monetary policy of buying financial assets to raise prices and lower yields when rates are near zero.

Market-based policies

Policies that use market signals and incentives (rather than direct regulation) to address externalities.

Pigouvian tax

A tax equal to the external cost of a negative externality, internalising the externality (e.g., carbon tax).

Carbon tax

A tax levied on carbon emissions to internalise the external cost of climate change.

Emissions trading scheme (ETS)

A permit-based market where firms buy/sell emission permits to meet a cap on overall emissions.

Renewable Energy Target (RET)

A government target for the share of electricity generated from renewables, often using certificates in a market mechanism.

Emissions Reductions Fund (ERF)

Australian fund that auctions funding for carbon abatement projects; winners earn carbon credits.

Safeguard Mechanism

Regulatory cap on net emissions for Australia’s large emitters to prevent offsetting ERF gains.

Regulation

Rules imposed by government to control activities; enforcement is essential.

Target

Policy goal or aspiration; not necessarily a legal requirement.

BOOT (Better Off Overall Test)

A test used in enterprise bargaining to ensure workers are better off overall under an agreement.

Enterprise bargaining

Negotiations at the firm level between employers and employees over pay and conditions.

Enterprise agreement

Pay/conditions agreed via enterprise bargaining; approved by the Fair Work Commission and must pass BOOT.

Common law contracts

Employment contracts outside the IR system; may include extra pay but cannot waive award conditions.

Awards

Industry-specific pay and conditions; set minimums and supported by law; consolidated to 122 awards.

Minimum wage

The lowest legal hourly wage; set by the Fair Work Commission and differs by age due to productivity considerations.

Gini coefficient

A measure of income inequality (0 = perfect equality, 1 = max inequality); Australia’s recent values around 0.328.

Human capital perspective

Education adds to skills and knowledge; generates private/public productivity and welfare benefits.

Signalling perspective

Education certifies attributes (e.g., conscientiousness) and signals ability to employers; benefits may be overstated.

HDI (Human Development Index)

A composite index measuring average achievement in health, education, and income.

National Competition Policy (NCP)

1995 policy to introduce competition in major state-owned monopolies; created competition and ACCC.

ACCC

Australian Competition and Consumer Commission; enforces competition policy and consumer laws.

Centralised IR

Industrial relations system where pay/conditions are determined largely by government or authorities.

Decentralised IR

IR system where pay/conditions are determined at the workplace/enterprise level with less government involvement.

Individualised IR

Extreme decentralisation where pay/conditions are negotiated individually between worker and employer.

Third party access

Access rights to essential infrastructure for third parties under the NCP framework.

Competitive neutrality

Policy ensuring PTEs don’t have a commercial advantage over private firms.

BOOT (again)

See above: Better Off Overall Test for enterprise agreements.

Gonski 2.0

Needs-based, equity-focused reform of school funding in Australia.

OECD

Organisation for Economic Co-operation and Development; international economic organization.

Economy-wide vs sector-specific policy

Macro policies influence aggregate demand; micro policies improve productivity and supply.