Question Discuss the economic functions of the Australian government and the role of the federal budget in stabilising economic activity

Question Discuss the economic functions of the Australian government and the role of the federal budget in stabilising economic activity.
Economic functions of Aus Gov’t

Reallocation of Resources- changes production patterns in the economy, through: Taxation and Spending (influencing businesses and consumer behaviours) and production of public goods.

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Redistribution of Income- Done through Taxation and Social Welfare Payments:

Stabilisation of economic activity: Policies designed to smooth economic fluctuations. Govt’s play important role in stabilising economic activity and sustaining EG
Stabilisation occurs through monetary and fiscal policies:
Monetary Policy- action of RBA influencing level of interest rates and MS
– Main instrument- DMO (buying and selling gov’t securities by RBA to influence interest rates).

Tightening MP- during boom Loosening MP- during recession
Change to interest rate Increase Decrease
Demand for Money Decrease Increase
MS Decrease Increase
Consumption/Investment Spending Decrease Increase
Eco Act Decrease Increase
Inflationary pressures Decrease Increase
Unemployment Increase Decrease
Economic Growth Slowing Stimulated

– Fiscal Policy- Action by gov’t altering Gov’t Expenditure, Savings and Taxation to manipulate economic growth and unemployment.

– Change in budget outcomes occur due to fiscal policy changes.
– Contractionary Fiscal Policy Stance- Decrease economic activity through dampening aggregate demand through either reduced taxation or increased expenditure.
– Expansionary Fiscal Policy Stance- Stimulating economic activity through aggregate demand through either increased taxation or reduced expenditure.
– Neutral Stance of Fiscal Policy Stance- No changes in budget outcome from year to year, therefore no effect on aggregate demand ; eco act levels.
– Automatic stabilisers- Instruments inherent in gov’t budget which counter-balance economic

Question What is meant by the term ‘market structure’? Describe the price and output policies of firms in perfect and monopolistic competition, compared to oligopoly and monopoly. How does increasing market power influence price and output and consumer welfare?
Market Structure- Number and relative size of firms within an industry, nature of the product sold and ease of entry for new firms. Or The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market

Market Structure Number and size of firms Product characteristics Barriers to entry
Pure Competition Many small firms Homogenous product No barriers to entry
Monopolistic Competition Many relatively small firms Differentiated products Relatively easy
Oligopoly Few , relatively large firms Differentiated products Extremely high
Monopoly One large firm No close substitutes Extremely high
Effects of changing levels of competition and market power on price and output
As more competition enters a market each firm has less influence on price setting or less market power and: more competition -> more output -> lower price

Consumer welfare refers to the individual benefits derived from the consumption of goods and services.

Question Describe the main labour market institutions in Australia. Analyse the influence of these institutions on recent outcomes and trends in the labour market.

• Industrial Relations System-
• Unions- An association of workers aiming to advance members interests by improving their wages and conditions. (They influence wage outcomes, exercise bargaining power negotiating with employers, restrict supply of labour)
• Employer associations- Lobby groups representing business interests, (lobby gov’t on industrial relations policies, assist employers in managing industrial relations issues).
• Current employment/industrial framework- The Ten National Employment Standards (Fair Work Act 2009), national minimum wage, modern awards, enterprise agreements.
• Modern awards- industrial awards provide minimum wages and working conditions for employees specific to their industry.
• Enterprise agreements- Workplace agreement negotiated collectively through enterprise bargaining between employers and employees.
• Common Law Contracts- Simple agreement involving add-ons to relevant awards between an employer and employee, enforced through court of law.