1. Economics HSC Topic 4 – Economic Policies and Management
Economics objectives in relation to:
Economic growth and quality of life: aim of sustainable rates that are non-inflationary and
resource efficient, 3-4%.
Full employment: Approach NAIRU, full use of resources maximises capacity to produce and
minimises the adverse economic and social problem of unemployment
Price Stability: inflation at 2-3% on average over the economic cycle as high inflation
reduces value of income, competitiveness, and causes uncertainty and loss of confidence
External Stability: Meeting long term financial obligations to rest of world in terms of a
sustainable current account, confidence in economy seen in $AU, sustainable foreign debt as
by debt-servicing ratio( percentage of expose revenue that is spent on interest payments)
Environmental sustainability: Economic growth creates negative externalities on
environment but increased focus has been made since recognition of long term prosperity
related to environmental challenges.
Distribution of income: Promoting fair distribution of income as free market can produce
unfair outcomes for those without opportunities.
Potential conflicts among objectives:
Inflation and unemployment, seen in Phillips.High AD  less UE but higher prices. Since ’93
policy chosen low inflation targets over unemployment.
Economic growth and external balance, in that strong growth can deteriorate current
account as o/s inv rises and profit goes o/s, “balance of payments constraint”
Economic Growth and Environment
Economic growth and inequality of income distribution (privatisation and microeconomic
policy leads to UE
Macroeconomic Policies
Macroeconomic policies have an impact on the overall level of economic activity. These
policies tend to influence the level of aggregate demand in the economy. The main role of
macroeconomic policy is to stabilise large fluctuations in the business cycle.
Fiscal Policy
Federal Government budgets and budget outcomes
Fiscal policy is a macroeconomic policy that implements government spending, taxation and the
budget outcome to achieve management of the economy. The budget shows the governments
planned expenditure and revenue for the next financial year. Three possible outcomes: a surplus, a
deficit, or a balanced budget.
 Discretionary changes in fiscal policy are those that are deliberate influencing the structural
component of the budget outcome.
 Non-discretionary changes in fiscal policy involve changes in revenue and expenditure
caused by changes in the level of economic activity.

2. Automatic Stabilisers are policy instruments in the budget that counterbalance economic activity:
 Unemployment benefits
 Progressive income tax system
Effects of budgetary changes on:
Resource Use: May directly impact resource use by spending in particular areas of the economy or
indirectly by specific taxing and spending policies to influence market decisions.
Income Distribution: Increasing income tax for high income earners and increasing welfare payments
Economic Activity: Expansionary, contractionary or neutral stance to influence consumption and
investment, influencing economic activity.
Methods of financing deficits
 Borrowing from the private sector: Government borrows from private sector by selling
Treasury Bonds under a tender system in which it sets the value according to the deficit.
However the “crowding out effect” will reduce funds in Australia’s domestic savings, putting
upward pressure on interest rates and leading to a reduction in private sector spending and
investment.
 Borrowing from overseas: These inflows of funds will directly lead to an increase in
Australia’s foreign liabilities. This will raise the net primary income deficit as the higher level
of foreign liabilities is serviced with higher interest repayments.
 Borrowing from the Reserve Bank (Monetary Financing): This effectively involves the RBA
printing money for the government to use to finance its expenditures. Printing additional
money has the effect of raising the supply of money in Australia and hence causes inflation.
 Selling Assets: Selling such assets does not reduce the level of fiscal deficit but in effect
allows for the government to borrow less in order to finance the deficit.
Uses of a surplus
 Repay any government overseas loans, reducing net external debt
 To fund government expenditure on infrastructure and the purchase of assets
 Depositing funds with the Reserve Bank, earning low rates of interest
 Using it to pay off public sector debt
 Placing money in specially established, government-owned investment funds
Monetary Policy
Purpose of monetary policy: Involves action by the Reserve Bank to influence the cost and
availability of money in the economy. The RBA aims for stability of Australia’s currency by
maintaining low inflation, reducing the level of unemployment and promoting a sustained
level of economic growth. Aims for inflation of 2-3% on average over the economic cycle.
Implementation of monetary policy by the RBA
The RBA uses Domestic Market Operations to conduct monetary policy. These are actions be the RB
in the short term money market to buy and sell Commonwealth Government securities in order to
influence the cash rate. As an increase in the cash market means it’s more expensive for financial
intuitions to obtain funds in the short term money market, they will increase the general rate of
interest for their customers to account for these payments. Similarly a reduction in cash rate will
influence a reduction in the general interest rates.

3. Impact of changes in interest rats on economic activity and the exchange rate
The RBA can either tighten monetary policy, high interest rates deters consumption and investment,
dampening economic growth, or loosen monetary policy, low interest rates means higher
consumption and investment increasing the level of economic activity.
Higher interest rates will attract more foreign savings, which must be converted into $A. This will
increase the demand for $A and put upward pressure on the exchange rate causing an appreciation.
Microeconomic policies
SEE SHEET (microeconomic policies)
Labour Market Policies
SEE SHEET (labour market policies)
SEE SHEET (Dispute resolution)
Decentralisation of the labour market refers to movements towards a labour market system where
determinations of wage outcomes are made at an enterprise or workplace level, with a more limited
role for industrial tribunals.
-------------------Centralisation -----------------------------------------Decentralisation --------------------
Single national wage Awards with wages set Enterprise bargaining Individual Contracts
case for all employees on an industry or
occupational basis
Arguments in favour of Decentralisation Arguments against Decentralisation
 Efficient allocation of resources and Lead to greater inequality through increased
structural change. Firms that are more “Wage dispersion”. This is because those
efficient can afford to pay more and workers with larger bargaining power can
therefore attract higher skilled workers receive higher wages
 Promote productivity since it gives May not be able to prevent the emergence of
employees the incentive to work harder wage-push inflation when economic growth is
due to direct rewards for productivity strong and the labour market is close to full
 Helps assist labour market adjust when employment
the economy is affected by negative Centralised wage determination can be used by
shocks, helping keep unemployment government as tool to achieve economic
rate lower objectives
Education and training programs
Governments can influence labour market outcomes through their policies relating to education and
training, apprenticeships, welfare benefits and employment services.
 Education and training: A high performing education system should mean that when
students join the workforce they have a higher level of productivity and reduced risk of
unemployment. Increased early childhood programs, strengtheningliteracy and numeracy
skills, investment in school facilities and computers, increasing training places, Skills
Australia,
 Labour market programs: Help place unemployed people into jobs. Job Service Australia,
imposing job seeking requirements on welfare recipients, Paid Parental leave.

4. National and global context for environmental management
SEE SHEET (Environmental management policies)
Limitations of economic policies
 Time Lags
Policy Implementation time lag Impact time lag
Fiscal Medium term (annual budget) Short term (few months)
Monetary Short term (monthly RBA) Medium term (6-18 months)
Microeconomic reform Long term (few years) Long term (up to 20 years)
 Global influences
As the Australian economy has become more integrated with the global economy, global factors
have become a greater constraint on economic policy .Australian government is now constrained by
the potential impact of policy on financial markets and in addition may voluntarily accept constraints
on their own economic policy in order to win concessions from other nations, such as through trade
agreements.In a global environment in which exchange rates and economics are vulnerable to
sudden shifts in financial flows, governments place a high priority on maintaining the confidence of
international investors and global financial markets. Global financial flows and interest rates may
affect monetary policy in Australia. Finally international organisations influence domestic policies.
The WTO enforces individual trade policies.
 Political constraints
Before a government implements a policy they must be sensitive to whether the policy is likely to
have public support as well as the support of their own political party, and by other stakeholders,
including influential business or union groups who contribute to campaign funds. The three year
political cyal means governments often only implement short term policies as this will enable them
to be in a better position to be re-elected.