Lecture 12 growth SP2, 2009

Lecture 12 growth SP2, 2009 - This lecture Easy Fiscal...

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Slide Slide 1 This lecture Easy Fiscal policy Inflation Monetary policy and growth Is inflation bad for growth Growth Definitions Sources of growth Australia’s growth record Growth policies Reading:Chapter 7, pages 270-278 (revision); Chapter 8 pages 298-321; chapter 13, pages 482-488 and Chapter 14, pages 498‑499; Chapter 15, pages 531-554.
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Slide 2 Easy Fiscal Policy Government increases G GDP rises – multiplier effect AD shifts right Md shifts right Interest rate rises… …’crowds out’ C & I …AD tends to shift left. . …and rise in r leads to appreciation of AUD. . …which also ‘crowds out’ NX. . …both r and AUD effects put leftward pressure on AD ..to counter a recession
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Slide 3 Easy Fiscal Policy & target rate of interest Government increases G GDP rises – multiplier effect AD shifts right Md shifts right However RBA has target rate of interest so r stays constant So no change to C & I or NX because neither r nor AUD changes …AD tends to shift to the full extent …potential overshooting problem – inflation could result
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Slide 4 Government increases G AD shifts right Upward pressure on r and AUD as before RBA announces higher target rate. . ..in order to reduce AD and inflation.
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Slide 5 Theory vs reality Theory assumes ceteris paribus Reality may produce non-predictable effects External shocks may adversely impact upon the RBA’s monetary policy objectives e.g. Assume economy is in recession. RBA attempts to stimulate economy through easy money. At the same time, there may be increased export demand for Australian goods. Result? Over-stimulation e.g. Assume economy is in recession. RBA attempts to stimulate economy through easy money. At the same time, there may be reduced export demand for Australian goods. Result? No stimulation Policy announcements have effects on expectations
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Slide 6 Theory vs reality In practice governments have run surpluses in recent years Reduction in accumulated government debt – ‘responsible’ financial management Have left AD management to RBA Used accumulated surpluses for infrastructure projects & controversial ‘vote-winning’ purposes Deficit spending appropriate for current recession? Contentious Implies debt But nominal value of debt constant but nominal value of taxes growing Who’s burden, current or future generation? proportion of GDP important Remember that growth will bring tax revenues Government consumption spending or infrastructure spending? Policy lags Reading: Chapter 8 pages 298-321
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Slide Slide 7 Inflation Inflation is a continuous rise in the general price level The inflation rate is measured as follows: Inflation Inflation rate rate Current year index Current year index Previous Previous year index year index Previous year index Previous year index × 100 100 =
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Slide Slide 8
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Lecture 12 growth SP2, 2009 - This lecture Easy Fiscal...

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