Detailed Notes on Economic Policies & Management

Resource Description

This note contains

• ECONOMIC OBJECTIVES
• MACROECONOMIC POLICIES
• MICROECONOMIC POLICIES
• POLICY RESPONSES AND THEIR EFFECTS

Economic Objectives

Economic management can be divided into three main categories:

• Economic growth: refers to increasing the level of goods and services in the economy, which
  increases the number of material wants to be satisfied, thereby increasing living standards
• Internal balance: refers to pursuing goals of price stability and full employment
• External stability: refers to keeping the current account, foreign liabilities and the exchange rate
  at sustainable levels Economic Growth and Quality of Life: refers to the overall wellbeing of individuals within a country according to their material living standards and indicators such as education levels, environmental quality and health standards.
• Economic growth should be between 3-4% (average for Australia is 3-3.25%)
• Australia, March 2015: 2.4% (net exports added 0.5% and consumer spending added 0.4%)
• Benefits of economic growth (see economic issues for further detail):
  – The increased quality of life for the population
  – Improved job prospects for the labour force
  – The opportunity for increased investment in infrastructure and public services

Full Employment

• Unemployment goal of 5-6% UE
• Full employment means the economy is at the non-accelerating inflation rate of unemployment
• Australia’s natural rate of unemployment is around 6-7%
• Cyclical unemployment can be reduced by macroeconomic policies (fiscal and monetary) while
  other types of unemployment must be reduced using microeconomic policies
  • Benefits of unemployment (see economic issues for further detail):
  – Full use of the economy’s resources
  – Decrease the social and economic effects associated with unemployment
  Price Stability
• The inflation target of 2-3% CPI
• Low inflation is a priority as it reduces nominal interest rates, fosters investment, encourages
  high savings maintains international confidence, sustain economic growth
• Negative effects of high inflation:
  – Reduces the real value of income and wealth
  – Reduces international competitiveness due to rising costs of production
  – Causes a depreciation in the exchange rate as foreign exchange markets lose confidence in the economy