Macroeconomics: National Income and Sectors

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Questions and Answers

What is the equation for disequilibrium in the economy?

(S + T + M) ≠ (I + G + X)

What is an expansionary economy characterized by?

S + T + M < I + G + X

What happens to the aggregate demand in a contractionary economy?

AD goes down

What is a trade surplus characterized by?

X > M Signup and view all the answers

What is the role of households in the economy?

They sell resources to firms, use income to purchase goods and services, and save money with the financial sector. Signup and view all the answers

What is the purpose of financial institutions in the economy?

To keep savings and lend money as investments to firms. Signup and view all the answers

Why are savings considered a leakage in the circular flow of income?

Because they reduce disposable income, leading to less consumption. Signup and view all the answers

How do investments by firms affect the economy?

They allow firms to expand, produce more goods and services, and employ more labor, increasing disposable income and consumption. Signup and view all the answers

What is the highest level of economic activity characterized by?

Lowest unemployment and highest inflation (usually demand pull) which results in high interest rates Signup and view all the answers

What is the main problem during a boom?

High inflation (usually demand pull) which results in high interest rates Signup and view all the answers

What is the lowest point of economic growth characterized by?

Highest unemployment and a recession, which is 2 consecutive periods of negative economic growth Signup and view all the answers

What is the main problem during a trough?

High levels of predominantly cyclical unemployment Signup and view all the answers

What happens to production, unemployment, and wages during an expansion?

Production increases, unemployment decreases, and wages increase Signup and view all the answers

What happens to production, unemployment, and wages during a contraction?

Production decreases, unemployment increases, and wages decrease Signup and view all the answers

Why does the RBA increase interest rates during an expansion?

To discourage spending and encourage saving, as the economy is expanding at an unsustainable rate Signup and view all the answers

What are the indicators used to measure the performance of an economy?

Standard of Living, Economic Growth, Income Distribution Signup and view all the answers

What are some environmental issues related to creating?

pollution, global warming, resource depletion, and loss of biodiversity Signup and view all the answers

What indicator is used to measure climate change?

CO2 and greenhouse emission intensities Signup and view all the answers

What is the target sustainable unemployment rate?

5-6% Signup and view all the answers

What is the formula for calculating the labour force participation rate?

Employed + unemployed / Total working age population Signup and view all the answers

What is underutilisation rate composed of?

Underemployment (less hours) + Unemployment (not always accurate) Signup and view all the answers

What is the age range considered working age population?

15-64 years Signup and view all the answers

What is measured by the indicator 'Intensity of use of water resources'?

Frequency, duration, and extent of water shortages, water prices Signup and view all the answers

What is the type of unemployment that occurs when individuals have part-time jobs but want to work more hours per week?

Underemployment Signup and view all the answers

What is the indicator for measuring air quality?

SOx and NOx emission intensities, urban traffic, density and car ownership Signup and view all the answers

What is the target range for inflation, and what is the current rate?

2-3% (currently 3.6%) Signup and view all the answers

What is the formula to calculate the rate of inflation?

Inflation rate = (Current CPI - Previous CPI) x 100 / Previous CPI Signup and view all the answers

Who are the winners in an inflationary economy?

Owners of low interest, fixed-rate loans and investors in commodities Signup and view all the answers

What is the opposite of inflation?

Deflation Signup and view all the answers

What type of unemployment occurs due to a mismatch between the skills demanded by employers and those possessed by the unemployed?

Structural unemployment Signup and view all the answers

What is the term for individuals who are not actively seeking work but would take a job if offered?

Hidden unemployment Signup and view all the answers

What is the cause of Cost Push Inflation?

Increased prices of key resources (e.g. oil/steel) Signup and view all the answers

What is the main difference between discretionary and automatic fiscal policies?

Discretionary fiscal policy involves deliberate changes made by the government to influence expenditure, whereas automatic fiscal policy involves changes in government expenditure as a result of the business cycle without any changes in policy. Signup and view all the answers

Provide an example of a discretionary fiscal policy and explain how it works.

The 2024-2025 Australian Federal Budget's decision to spend $1.6 billion on tertiary education is an example of a discretionary fiscal policy. This deliberate change in government expenditure aims to influence the economy, in this case, by investing in education. Signup and view all the answers

How does an automatic fiscal policy, such as Centrelink Unemployment benefits, affect the budget during a downswing and an upswing?

During a downswing, the government spends more on Centrelink Unemployment benefits due to higher unemployment rates, leading to a higher budget deficit or lower budget surplus. Conversely, during an upswing, the government spends less on these benefits as more people are employed, resulting in a lower budget deficit or higher budget surplus. Signup and view all the answers

What is the effect of a downswing on taxation revenue, and how does this impact the budget?

During a downswing, incomes are reduced, leading to lower taxation revenue, which results in a higher budget deficit or lower budget surplus. Signup and view all the answers

What is the purpose of a budget surplus, and how does it affect the economy?

A budget surplus occurs when taxation revenue exceeds government expenditure, and its purpose is to sustain economic growth while reducing inflation. It has a contractionary effect on the economy. Signup and view all the answers

What is the role of fiscal policy in achieving economic stability?

Fiscal policy, through both discretionary and automatic policies, affects the budget outcomes, which in turn, influence economic stability. Signup and view all the answers

How do budget outcomes affect economic stability?

Budget outcomes, which are a result of both discretionary and non-discretionary fiscal policies, affect economic stability. A budget surplus or deficit can influence the overall economy, with a surplus having a contractionary effect and a deficit having an expansionary effect. Signup and view all the answers

What is the relationship between fiscal policy and the business cycle?

Fiscal policy, through automatic policies, responds to changes in the business cycle, and, in turn, affects the economy. Discretionary policies can also influence the business cycle. Signup and view all the answers

Study Notes

Disequilibrium and Economy

Disequilibrium occurs when the sum of savings (S), taxes (T), and imports (M) is not equal to the sum of investments (I), government expenditure (G), and exports (X)
Expansionary economy: S + T + M < I + G + X, leading to an increase in aggregate demand (AD)
Contractionary economy: S + T + M > I + G + X, leading to a decrease in AD
Trade surplus: X > M, indicating a positive balance of trade
Trade deficit: X < M, indicating a negative balance of trade

Sectors of the Economy

Household sector: consists of consumers who sell resources to firms in exchange for income, and then use that income to purchase goods and services
Firms: use resources from households to produce goods and services, and may also invest with the financial sector
Financial sector: keeps savings from households and lends money to firms for investments
Government sector: receives taxes from households and firms, and may also implement fiscal policies to influence the economy

Business Cycle

Boom (peak): highest level of economic activity, characterized by low unemployment and high inflation
Trough (recession): lowest point of economic growth, characterized by high unemployment and low inflation
Expansion (upswing): production increases, unemployment decreases, and wages increase
Contraction (downswing): production decreases, unemployment increases, and wages decrease

Performance of the Australian Economy

Indicators used to measure performance: standard of living, economic growth, income distribution, and environmental sustainability
Measurement of environmental sustainability: CO2 and greenhouse gas emissions, air quality, ozone layer, freshwater resources, energy resources, biodiversity, and waste generation

Unemployment

Unemployment rate: percentage of the labour force unable to find employment
Target unemployment rate: 5-6%
Labour force participation rate: percentage of the working-age population employed or actively seeking employment
Types of unemployment: long-term, hard-core, underemployment, frictional, seasonal, cyclical, and structural

Inflation

Inflation rate: percentage change in the Consumer Price Index (CPI) over a year
Target inflation rate: 2-3%
Effects of inflation: reduces purchasing power, increases opportunity cost, and benefits owners of low-interest loans and commodity investors
Types of inflation: cost-push and demand-pull

Fiscal Policy

Discretionary fiscal policy: deliberate changes to government expenditure to influence the economy
Automatic fiscal policy: changes in government expenditure due to the business cycle, without government input
Examples of fiscal policy: Centrelink unemployment benefits, taxation revenues, and government spending on education and infrastructure

Budget Outcomes

Budget deficit: government expenditure exceeds taxation revenue, leading to a higher budget deficit or lower budget surplus
Budget surplus: taxation revenue exceeds government expenditure, leading to a lower budget deficit or higher budget surplus
Budget outcomes are influenced by both discretionary and automatic fiscal policies, and affect economic stability

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Description

Quiz on macroeconomic concepts, including disequilibrium, expansionary and contractionary economies, trade surplus and deficit, and the household sector in the economy.