Macroeconomics Flashcards: Fiscal Policy, Monetary Policy, AS-AD, and Micro/Macro Concepts

These flashcards cover key terms and definitions from the lecture notes across fiscal policy, monetary policy, macroeconomic objectives, AS-AD concepts, and related micro/macro reforms.

Circular Flow Model (CFM)

A macroeconomic model showing five sectors (households, firms/production, financial, government, foreign) and the main real and financial flows among them (e.g., consumption, investment, taxation, government spending, exports, imports).

Households (CFM sector)

One of the five sectors; households consume goods/services and supply factors of production.

Firms/Production sector

The producers of goods/services; they demand factors of production and supply goods/services.

Financial sector

Banks and other institutions that move funds between savers and borrowers.

Government sector

The sector that collects taxes and spends on public goods and services.

Foreign sector

The rest of the world with which the economy interacts through trade (imports/exports) and financial flows.

Consumption

Household spending on goods and services.

Savings

The portion of income not spent on consumption; funds are allocated via the financial sector.

Investment

Expenditure on capital goods by firms to increase future production capacity.

Taxation

Revenue collected by the government from households and firms.

Government expenditure

Government spending on goods/services and transfers to individuals or other sectors.

Imports

Goods/services produced abroad and purchased domestically.

Exports

Domestic goods/services sold to the rest of the world.

Automatic stabilisers

Non-discretionary fiscal features that automatically counterbalance changes in economic activity (e.g., progressive income tax and unemployment benefits).

Income tax

A tax on personal earnings; an example of an automatic stabiliser.

Unemployment benefit

Transfer payments to unemployed individuals; an automatic stabiliser.

Macroeconomics

Study of the economy as a whole and large-scale indicators like GDP, inflation, and unemployment.

Microeconomics

Study of individual markets, firms, and households.

Discretionary fiscal policy

Deliberate changes to fiscal policy (spending and taxation) to influence aggregate demand.

Subsidy

Financial assistance to support a firm, industry, or activity.

Tobacco tax

Tax on tobacco products used as a fiscal instrument.

Expansionary fiscal policy

Fiscal stance aimed at increasing aggregate demand via higher spending or tax cuts.

Contractionary fiscal policy

Fiscal stance aimed at reducing aggregate demand via lower spending or higher taxes.

Multiplier effect

An initial autonomous expenditure increase leads to a larger overall increase in national income.

Autonomous expenditure

Expenditure that does not depend on current income (exogenous).

Sustainable economic growth

Long-run growth with stable inflation and full employment.

Full employment

A level of employment where nearly all resources are utilized.

Inflation target

The central bank’s desired rate of inflation to anchor expectations.

Inflation target range (2-3%)

The specified inflation rate range that policymakers aim to achieve.

Internal stability

Stable domestic macro conditions (e.g., price stability, sustainable growth).

External stability

Stable balance of payments and external position (exchange rate and external accounts).

Macroeconomic objectives

Goals such as sustainable growth, full employment, price stability, internal and external stability, improved living standards, and productivity.

Expansionary budget stance

Policy aimed at boosting economic activity by increasing spending or cutting taxes.

Contractionary budget stance

Policy aimed at reducing economic activity by cutting spending or raising taxes.

Budget deficit

When government expenditures exceed revenues.

Budget surplus

When government revenues exceed expenditures.

Fiscal demand management policies

Fiscal tools used to influence aggregate demand (e.g., spending, taxation).

Supply-side policies

Policies aimed at increasing production capacity and aggregate supply.

Time lags

Delays between recognizing an issue, implementing policy, and seeing effects.

Global influences

Open-economy factors that can offset or alter domestic fiscal interventions.

Political constraints

Limitations from political processes and agendas on policy implementation.

Inflationary expectations

Expectations about future inflation that can influence current decisions.

Direct taxation

Taxes paid directly on income or profits (e.g., income tax).

Indirect taxation

Taxes on goods/services collected indirectly (e.g., VAT, sales tax).

GBEs

Government Business Enterprises—government-owned enterprises.

Capital expenditure

Government spending on long-term assets (infrastructure, plants).

Current expenditure

Day-to-day government spending on goods and services.

Transfer payments

Government payments to individuals not in exchange for goods/services (pensions, welfare).

RBA

Reserve Bank of Australia; central bank responsible for monetary policy, currency stability, and economic welfare.

Inflation targeting

A policy of setting a specific inflation rate or range to anchor expectations.

Transmission mechanism

Channels by which monetary policy affects the economy: 4 channels in this context.

Savings and investment channel

Monetary policy affects saving and investment decisions via changes in the policy rate.

Cash-flow channel

Changes in cash flows (e.g., debt servicing) influence spending and borrowing.

Asset price and wealth channel

Policy effects on asset prices and household wealth that influence spending.

Exchange rate channel

Policy rate changes affect exchange rates, impacting imports/exports.

Cash rate

The central bank’s primary policy interest rate.

Aggregate demand (AD)

Total demand for goods/services in the economy at different price levels.

Aggregate supply (AS)

Total quantity of goods/services producers are willing to supply at different price levels.

Keynesian AS

AS with a horizontal section at low capacity and a vertical section at full capacity; differs from classical view.

Classical AS

View that AS is perfectly inelastic (long-run supply fixed by resources).

Microeconomic reform

Policies to improve production capabilities and structural efficiency in the economy.

Floating exchange rate

Exchange rate determined by market forces rather than fixed by policy.

Prices and Income Accord

1983 agreement between government and unions to restrain wage demands in exchange for inflation reduction and welfare investments.

Medicare

Public health care program established under the Accord era reforms.

Tax cuts for low-income workers

Tax relief targeted at low-income households to improve welfare and demand.

Deregulating the financial industry

Removing barriers to competition in finance, allowing banks to set rates and innovate.

GDP measurement types

Income-based, Output-based, and Expenditure-based GDP measurements.

Y = O = E (equilibrium)

In the long run, national income equals output equals expenditure.

Infrastructure investment

Public spending on infrastructure to boost productivity and AD/AS.

R&D investment

Spending on research and development to improve productivity.

Labour market reform

Policies to improve efficiency and utilization of the labour force.

Tax reform

Changes to the tax system to improve targeting and efficiency.

Allocative efficiency

Resource distribution that maximizes societal welfare.

Technical efficiency

Producing the maximum output from given inputs.

PPC (Production Possibility Frontier)

A curve showing the maximum feasible combinations of two goods given available resources and technology.