ECO - Unit 4 Economic Policies & Management

what is macroeconomic policy?

government actions that aim to influence aggregate demand and stabilise fluctuations in the business cycle

what is the main objective of macroeconomic policy?

move the economy (actual output) towards potential output

what are the two types of policy within macroeconomic policy?

• monetary policy

• fiscal policy

what does monetary policy refer to?

involves actions taken to change the level of interest rates in the economy (RBA responsible in Australia)

what does fiscal policy refer to?

involves the government manipulating the level of government spending and/or taxation

what are the two objectives part of the dual mandate of monetary policy?

• Price stability: achieve low & stable inflation (2-3% per year)

• Full employment: no cyclical UE, minimalised frictional & structural UE

what are the economic objectives of Unit 3?

• economic growth & quality of life

• full employment

• price stability

• external stability

• distribution of income

• environmental sustainability

what is an example of a conflict between objectives (monetary specfic)?

price stability VS full employment

• expansionary policy decreases UE but increased inflation

• 2021-2024 raising rates gradually to preserve labour market gains

what are some limitations of monetary policy?

• long impact time lags (1-2 years maximum effect)

• only effective to combat demand-pull inflation

• global influence (interest rate differential & X demands)

• blunt instrument (cannot target specific states/sectors)

what are OMO’s in monetary policy (Open Market Operations)?

where the RBA influences the supply of ESA balances through buying/selling bonds

what are memory key for OMO actions?

• “sell to support” > increase rate by decreasing supply

• “buy to bring down” > decrease rate by increasing supply

what does unconventional monetary policy involve?

yield curves (forward guidance & asset purchases)

how does forward guidance (unconventional MP) impact the economy?

shapes yield curve by impacting investors’ expectations around future policy rates

• eg RBA commits to keeping rates slow = curve flattens

what are the four channels of the transmission mechanism?

• savings & investment (incentives)

• cash-flow (cash available after changing debt values)

• asset prices & wealth (ability to borrow/spend)

• exchange rates (interest rate differential)

what was quarterly GDP measured as at its’ lowest during COVID? (MP)

-6.7%

what did the RBA lower the cash rate to? (MP)

0.25% - 0.1%

when did inflation become an issue? (MP)

Dec 2021 - 3.5%

what did inflation peak at during COVID? (MP)

Dec 2022 - 7.8%

when did the RBA begin raising interest rates? (MP)

May 2022

how many rate increases were there over 1.5 years? (MP)

13 total

what did the RBA increase rates to? (MP)

4.35% in Nov 2023

what does the fiscal outcome refer to?

measure of gov spending/taxation (surplus, neutral or deficit)

what does the fiscal stance refer to?

the relative change in the outcome

• (eg expansionary is less spending to more spending)

what are the three objectives of fiscal policy?

• resource allocation

• income distribution

• economic activity

what are the two policy exemplars for fiscal policy?

• JobKeeper

• JobSeeker