Important Notes macro

Topic 4: product market

Decrease in Income Taxes
Lower income taxes, implies higher disposable income and profit => Consumer will have
more money after tax to spend => Increase in private consumption and increase in
investment. Therefore Increase in AD, shift AD curve to the right.
Outcome: Increase in Price and Increase in RGDP

Lower Interest Rates

Cost of borrowing to consumer decrease and consumer will tend to save less and spend
more (may also increase consumer confidence, if economy is booming)  Increase in
private consumption. At the same time, lower interest rates will also decrease the cost of
borrowing to businesses which may increase business confidence  Increase in Investment
(I). Both of these will increase AD and shift curve to the right
Outcome: Increase in Price and Increase in RGDP

Topic 8: Financial System, Money and Credit Creation

Topic 9: monetary Policy

RBA implement an expansionary monetary policy by OMO to purchase securities
1. Cause and effect chain on expansionary
When RBA buys bonds, the investor receive money from RBA which then be put in the
banks, Therefore the number of cash deposits and cash reserves in the bank increase which
will be an increase in money supply, thereby shifting the money supply curve to the right
and reducing overnight cash rates, because banks borrow money to RBA, have to pay lower
rates, and banks pass lower rates to customer through mortgage rates, commercial business
rates and short term interest  Decrease in other interest rates in the economy 
decrease in the cost of borrowing  more credit available  increase in Private
consumption ( C) and Increase in Private Investments(I)  Increase in AD and RGDP.

At the same time, a lower interest rate in AUS tend to result in depreciation of $ since AUS
financial investment are becoming less attractive to overseas financial investments 
Export (X) cheaper, Import (M) more expensive. Therefore Increase in Net Export  Further
Increase AD and RGDP. As a result, Increase Inflation to RBA’s target 2-3%, Increase in
employment and Decrease in Cyclical unemployment.

2. Impact on GDP, Money supply and Interest rates.

When the RBA buy bonds, the investors receive money from RBA which then be put in the
banks, therefore the number of cash deposits in the bank increase which will be an increase
in the money supply.
1st Impact – the availability of lending increase (bank have more money to lend out and the
more they lend out the higher the credit creation will be due to money multiplier 
consumer have more money available to spend same with businesses  Increase in private
consumption and investment  Increase in AD and shift to the right
2nd Impact- As Money supply Increase  lower interest rate  encourage more consumers
and businesses to borrow money  Increase in private consumption and investments 
increase in AD, shift AD curve to the right  Increase price of product and Increase Inflation
to RBA’s target rate 2-3%  Increase economic activity
- Product market  AD shift right  increase price of product  Increase Inflation to
RBA’s target 2-3%
- Increase In RGDP will increase demand for labour and reduction in cyclical
unemployment
Purpose of Policy
If the economy is in a contractionary phase/ recessionary. By RBA buying bonds and
securities and reducing cash rate flow on effect on other interest rates to decrease, hoping
to boost consumption, investment and AD. Therefore to help economy to grow faster in
order to fight deflation and unemployment.

2.3 ‘What is the cash rate? What role does it play in monetary policy?
Cash rate is interest rate that banks(RBA and others) charge each other on the overnight
money market.
Therefore if that changes, banks are likely to change interest rate in the same direction for
other bank loans to commercial loans, mortgage rates and short term interest rates. The
cash rate is a benchmark rate that underpins interest rate on deposits and loans.
- The banks also borrow money on international wholesale market, sometime they are
not able to pass on full reduction on interest rate, according to cash rates.
- Cash rate to boost economic activity AD and RGDP and employment or help to
contract a little if the economy is overheating, causing inflationary problems and
causing problems on Net Exports.

3.2 If the RBA believes the economy is about to fall into a recession what actions could it
take?
Conduct expansionary monetary policies, increasing liquidity and deposits, reducing cash
rates, shifting money supply curve to the right and therefore reducing other interest
rates.
3.3 If the RBA believes that the inflation rate is about to increase above its target rate,
what actions could it take?
Conducting contractionary monetary policies, by selling bonds and securities therefore
decrease in deposits and cash reserves in the money market  push up cash rates and
interest rate  lower Consumption, Investment and Net Export  lower AD, AD shift to
the left and  Decrease in Price of the product and Inflation to its target rate 2-3%.
4. Disadvantage of Monetary Policy (Is it effective or not right now?)
Not effective in Monetary policy expansionary, when the economy is in a trough or
recession because of low consumer and business confidence the cash rate has never
been this low (0.25%) and analysist are predicting rate cut (decrease until 0.1% even
negative).
If consumer or House hold feel pessimistic about the future income and job security they
will not spend money, instead they will save money. Data for AUS  where house hold
saving rate increase from 6% to almost 20%. House Hold tend to save for the worst and
defer their purchases on durable goods than spending. Business confidence 
 pessimistic about their future sales and future profitability therefore, reluctant to
invest.
- The cash rate is historically at low level and also interest rate but, businesses and
consumer are not spending.
Even though Interest rate is low in AUS, expansionary monetary policy might below 
negative impact on dollar (depreciate), but they could be opposing forces, such as th
price of exported resources (AUD and Canadian $ are commodity currencies) If the
commodities we export around the world attract much higher price, the speculator
predict expect higher AUD so they will buy more AUD and push the dollar up
(appreciate)
- AUS is a global company, AUS is impacted by what is happening in the economy of
major trading partners  if major trading partner is contracting, There will be a
negative impact on net export of AUS and lower AD.
- An expansionary monetary policy  bank, seeks for liquidity/ cash. A bigger
proportion of their deposits than what RBA requires them (e.g 10% deposits in cash,
they might decide to put 30% in cash), because they are expecting a lot of borrowers
not able to put debts and mortgages  counteracts the RBA policies on the interest
rates  APRA (ensure the banks don’t do wrong things), relax restrictions on lending
practices, because wants to encourage people to borrow more and spend more
money, but consumer and producers as well.

Topic 10: Fiscal Policy

Non- Discretionary Fiscal Policy (Automatic stabilizer)

During contraction, recession or through
Because less people are working, more people are dependent on unemployment benefits,
therefore decrease in taxes on income collected and increase in government spending
especially on unemployment benefits. At the same time, decrease in production and
decrease in profit and possibly incurrence of losses and business is closing down 
Decrease in taxes collected by the government and Increase in govt spending Automatically.

Smooth out sharp decline in economic activity and will reduce the negative impact of higher
unemployment and businesses going bankrupt.
Automatic stabilizer have the affect on lessening the impact of extreme changes in
economic activity.

Discretionary Method
If economy is contracting too sharply; (negative RGDP)  govt increase spending (e.g.
Jobskeeper subsidies, increase job allowance, bring forward infrastructure spending)  help
economy to recover faster, rather than allowing to the natural course which will hurt
businesses.

3 Fiscal Position
Budget Deficit- Expected Govt Revenue or taxes is less than Expected Government
Spending. (T<G)
To reduce unemployment by more subsidies to firms to hire long term unemployed, more
retraining and re- skilling on long term unemployed .
Government apply when recession
Government applying expansionary fiscal policy by lowering taxes and Increasing spending
- Comparing to previous year budget deficit ( spending > income, deficit add debts) in
previous year is much smaller and this year and next year budget deficit will reach
($216b), compared to previous period we have expansionary fiscal policy
2 ways govt can manage macro economy by taxes and govt spending
Recession -> High cyclical unemployment and deflation(prices going down). Therefore apply
Expansionary Fiscal Policy  Increase Govt Spending and Decrease Taxes.

Aggregate Expenditure Function Problems

2. You are given the following information about an economy:

C = 10 + 0.8Y
I = 50
G = 20
NX = 0

a. Calculate the marginal propensity to consume.(MPC )

= 0.8 – find this in C = 10 + 0.8Y

C= Co + cY
Co= autonomous spending (net worth, pas saving and availability of credit)
cY= percentage of total income do we spent
c = marginal propensity to consume(MPC) = change in consumption spending/ income
change

b. At what value of GDP does equilibrium exist?

Use AE or Y (rgdp) function:

Y = C + I + G + NX
Y = 10 + 0.8Y + 50+ 20+0
Y = 80 + 0.8Y
1Y – 0.8Y = 80
0.2Y = 80
Y = 80/0.2
Y= 400 (old GDP)

c. Calculate the value of the multiplier. (MPC= 0.8)(MPS = 0.2)

Formula: Ke = 1/ MPS
= 1 / 0.2 = 5
d. If government spending increased by $40 million, what would be the new equilibrium
GDP.

Use Changing in govt spending formula in book (ke =5)

Change in Y = Ke x change in G
= 5 x (40-0)
= 5 x 40
= +200
New equilibrium GDP = 400 + 200 = $600 million