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Economic Issues: How monetary and fiscal policy address specific issues…
Economic Issues: How monetary and fiscal policy address specific issues
Economic growth and quality of life
Fiscal (budget stance)
Taxation
Discretionary
Raising the MRT
Expenditure = injection, taxation = leakage --> Gov can influence AD (however more effective in stimulating growth during downturn than slowing fast EG
Lowering company tax to 25%
Non-discretionary (cyclical)
Automatic stabilisers (unemployment benefits + PITS)
Spending
Income-expenditure diagram
Monetary
Influencing interest rates = AD influenced
May be influenced by fiscal decisions (e.g. tax reductions)
Full employment
Fiscal
Funding training
Means testing
Families Package and Child Care: Families earning <$65,000 - 85% of childcare fees covered
Restart program (2014): subsidy paid to employers when they hire older works, addresses mature long-term unemployment
Monetary
Keeping EG between 3-4% to keep up with productivity and population growth (Okun's law)
Labour = derived demand
External stability
Fiscal
Fiscal consolidation: Ensuring the government does not draw on savings which could otherwise be used to fund domestic investment
Crowding out vs crowding in
Widening export base
Affects national savings, less reliance on foreign funds
Reducing CT to 25%, improves profitability and international competitiveness
Monetary
Affects import demand and export competitiveness
However tightening is short-term and can lead to slowdown of whole economy + private debt not a concern
Affects ratio of consumption to imports (BoGS), capital inflows, NPI/NFL --> CAD
Impacts ER (Higher IR --> Higher AUD
Policies can only indirectly influence
Distribution of Income
Fiscal
Tax
Progressive
Raising the TFT (2012)
GST = bad
Spending
Pensions/transfer payments
NDIS
Cutting penalty rates = bad
Monetary
Higher economic growth = bad for inequality
However can help to reduce unemployment
Price stability
Fiscal
Monetary
Pre-emptive use of MP can ward off inflationary pressures during times of EG
e.g. immediately after GFC, RBA lowered interest rates to 45 year lows in anticipation of global recession
Environmental Sustainability
Monetary
Less EG = less waste?
Fiscal
Direct or indirect reallocation of resources
Provide incentives for environmentally beneficial activities
Tax on harmful activities (carbon tax: $23/carbon-tonne, 7% decrease in emissions)
Direct provision