6355 Lecture Notes - Lecture 12: Deadweight Loss, Opportunity Cost, Economic Surplus
Policy objects are always for economic growth, full employment and stable price levels.
Fiscal policy: changes in federal taxes and purchases that are intended to achieve macroeconomic
policy objectives, such as high employment, price stability and health rates of economic growth.
Refers to the actions of the federal government, and not state, territory or local governments.
Expansionary fiscal policy: increases in government purchases and/or decreases in taxes in order to
increase aggregate demand.
An increase in government purchases will increase aggregate demand directly.
A reduction in taxes has an indirect effect on aggregate demand through the affect on disposable
income
The goal of expansionary fiscal policy is to increase aggregate demand by more than it would have
increased without policy.
Appropriate when the economy is in equilibrium below full-employment.
Contractionary fiscal policy: decreases in government purchases and/or increases in taxed in order
to reduce aggregate demand.
Appropriate when the economy is above full employment equilibrium and the inflation rate is high.
Automatic fiscal stabilisers work to stabilise the economy without the need to change policy.
E.g. progressive personal income tax rates and transfer payments.
Two main problems with fiscal policy effectiveness:
1. Timing lags
2. Crowding out
Monetary policy: the actions taken by the reserve bank to manage interest rates in the pursuit of
macroeconomic goals.
Inflation targeting: conducting monetary policy so as to commit the central bank to achieving a
publicly announced level of inflation.
Bonds are a legal promise to repay a loan, including the principal amount and regular interest
payments.
Open-market operations are the standard methods central banks use to change the money stock in
modern economies.
Cash rate: the interest rate on loans in the overnight money market. Determined by the interaction
of demand for and supply of funds in the overnight money market.
Expansionary monetary policy: the use of monetary policy by the RBA to decrease interest rates and
increase real GDP
Exchange settlement accounts: accounts held with the RBA by banks and other financial institutions
to enable the overnight transfer of funds between financial institutions.
Contractionary monetary policy: the use of monetary policy by the RBA to increase interest rates
and reduce inflation.
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Document Summary
Policy objects are always for economic growth, full employment and stable price levels. Fiscal policy: changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives, such as high employment, price stability and health rates of economic growth. Refers to the actions of the federal government, and not state, territory or local governments. Expansionary fiscal policy: increases in government purchases and/or decreases in taxes in order to increase aggregate demand. An increase in government purchases will increase aggregate demand directly. A reduction in taxes has an indirect effect on aggregate demand through the affect on disposable income. The goal of expansionary fiscal policy is to increase aggregate demand by more than it would have increased without policy. Appropriate when the economy is in equilibrium below full-employment. Contractionary fiscal policy: decreases in government purchases and/or increases in taxed in order to reduce aggregate demand.