Transcript 2.5 The Government

2.5 The Government
Lesson objectives
• Use of Monetary Policy to control
inflation
Manipulating the money supply (interest rates) to control economic activity
(inflation)
Inflation needs to be
between 1-3%!!!
Review
PTA (1-3%)
Reserve Bank
Government
2.5%
Loans
2.75%
Settlement
Cash
2.25%
Retail banks
Retail banks
2.5%
Reserve Bank
Settlement
Cash
2.25%
Producers
Retail banks
Loans
6.40%
Consumers
Retail banks
The OCR will affect wholesale and retail rates and as a
consequence the economic activity
Loan
Sharks
Credit
cards
Over
drafts
Home
loans
Wholesale IR
2.75%
6.40%
12%
21%
32%
The Effect on consumers
and producers
I think inflation
is going to
happen!!
3.5%
Reserve Bank
Wow I’m not
going to loan to
buy capital
goods!! Its to
expensive
5%
3.15%
Up ne
o!?
Producers
Retail banks
6.40%
8%
Wow that’s a
good savings
rate I’m not
gonna spend I’m
gonna save!!!
I no na
nee!?
Consumers
The Effect on consumers
and producers
Decreased retail
Increased
retail
interest rates give
consumers lower
higher
incentive to save.
Consumption
spending rises!
falls!
Consumers
Producers
Reserve Bank
I think inflation
deflation
is
is going
going to
to
happen!!
happen!!
Decreased retail
Increased
retail interest
interest
rates give producers higher
lower
incentive to borrow as cost
of borrowing is lower.
higher.
Investment spending rises!
falls!
Monetary summary (so far)
Reserve bank
expects inflationary
pressure
RB increases the
Official Cash Rate
(OCR)
Banks increase retail
rates (to maintain
profit levels)
Consumers, higher
incentive to save. C
falls
Producers, lower
incentive to borrow.
I falls
Inflationary
pressures ease,
inflation controlled.
Monetary summary (so far)
Reserve bank
expects deflationary
pressure
RB decreases the
Official Cash Rate
(OCR)
Banks decrease retail
rates.
Consumers, lower
incentive to save. C
rises.
Producers, higher
incentive to borrow.
I rises
deflationary
pressures ease,
Questions
• Describe how the Reserve Bank will react to the
following. Outline how this reaction will solve the issue.
1. High consumer spending is putting pressure on retail prices.
2. Dairy export profits have fallen dramatically effecting New
Zealand's economy.
3. Housing Market has dropped and consumers are now reluctant
to spend.
4. Consumer confidence is at a all time high as spending begins to
sky rocket.
.
2.5 Government and Inflation
Increase or Derease OCR
1.
Consumer spending increase?.
2.
Large investment done by
firms?
CPI below 1%?
House prices double?
Exports fall dramatically?
3.
4.
5.
1.
increase
2. increase
3. decrease
4. increase
5. decrease
I`m glad I have
been watching the
news and keeping
up with business!
2.5 Government and Inflation
1.
2.
3.
4.
5.
Name the agreement between
the Government and Reserve
Bank? .
1.
What is the main objective of
the agreement?
2.
Name the 2 people who sign
the agreement?
The termed used to describe
deposits made by retail banks
3.
to the Reserve Bank?
OCR is 2.5% what does OCR
stand for?
Policy Targets Agreement
Price stability (inflation
between 1-3%)
Bill English and Dr Alan
Bollard
4. Settlement cash
5. Official Cash Rate
I`m glad I have
been watching the
news and keeping
up with business!
Lesson Objectives
• Monetary Policy and the effect on
Net Exports
Review
PTA (1-3%)
Reserve Bank
Government
2.5%
Loans
2.75%
Settlement
Cash
2.25%
Retail banks
The Effect on consumers
and producers
I think inflation
is going to
happen!!
3.5%
Reserve Bank
Producers
Wow I’m not
going to loan to
buy capital
goods!! Its to
expensive
5%
3.15%
Retail banks
6.40%
8%
Consumers
Wow that’s a
good savings
rate I’m not
gonna spend I’m
gonna save!!!
C
Consumers will start to spend less and save more as they
can get greater return on having money in the bank. They
will also tend to borrow less due to the cost of credit!
I
Producers will hold back on their investment( purchasing
capital goods). This lowers investment
G
(X-M)
Uh oh!
Remember the
triple whamy!!!!
As a result of our high interest rates (set
by the OCR) compared to other countries,
overseas investors will be attracted to our
banks!!!
3.00%
0.5%
0.5%
Hmmm,
where should
I put my
money
ASB
S$NZ
D$NZ
2.50%
Forex Market
Canadian
investor
$NZ dollar appreciates which makes our exports more
expensive to overseas countries. X goes down.
$NZ dollar appreciates which makes M cheaper so New
Zealanders will start to import more overseas G and S!
(X-M)
Apply to the AD/AS Model
C
AS
Price
Level
I
G
(X-M)
PL
P L1
AD
Output/GD
P
AD1
Output
NOTE:
There can be some easing of this effect!
When there is an appreciation of the $NZ
imported raw materials for producers
becomes cheaper, which lowers COP so AS
will shift to the right!
What about when OCR rates
fall?
When interest rates fall we see an
opposite effect!
C
I
G
(X-M)
1.
Quick Quiz
Name the signatories of the Policy Targets Agreement.
Bill English and Greame Wheeler
2. Explain what is meant by the Official Cash Rate.
The overnight rate at which registered banks deposit settlement cash and
take loans from the reserve bank
3. Identify and explain ONE effect of a decrease in interest
rates (OCR) on the following:
International trade
Increase
Effect
Reason for the effect
NZD is falls as NZ’s interest rates are less attractive to overseas investors.
X increases, more price competitive, M falls, more expensive to purchase. NET
EX increases
4.
Explain how inflation is affected when the
RBNZ increases the OCR. Refer to consumers
and producers in your answer.
Lesson Objectives
• Affect of monetary policy on Growth
and Trade
C
I
Consumers will start to spend less and save more as they
can get greater return on having money in the bank. They
will also tend to borrow less due to the cost of credit!
If Inflationary
pressure
is
predicted/
Producers will hold back on their investment( purchasing
capital goods).
This lowers
investment
occurs
OCR
is
raised !!!!
G
(X-M)
Dollar appreciates due to overseas investors coming to NZ
banks. Exports become relatively more expensive and
imports are relatively cheap
Trade (short term)
• During a tight monetary policy (raising OCR)
Trade will fall (worsening of the current account)
Dollar appreciates due to overseas investors coming to NZ
banks. Exports become relatively more expensive and
imports are relatively cheap.
• During a loose monetary policy (lowering OCR)
Trade will rise (improving of the current account)
Dollar depreciates due to overseas investors coming to
NZ banks. Exports become relatively cheap and imports
are relatively more expensive.
Reserve Bank’s policy to keep inflation to between 1-3% will create price
stability!
If our inflation rate is lower than our competitors then our export prices
will be more competitive in the long-run!
Balance of
Payments improves
AS1
Pe1
Pe
Qe1
Qe
Yf
Due to inflation the
ASReserve Bank runs a
Tight Monetary Policy
( C, I, G decreased)
As a result of the
Tight Monetary Policy
inflation relieved but
AS shifts to the left
dueAD
to Higher C.O.P.
GROWTH IS
AD1 REDUCED!
AS will increase as firms are more confident about the future
inflation rates;
•Firms can keep costs at a stable rate
•Firms can enter long term contracts
•Costs of investment remain stable
•Increased business confidence
Growth (SHORT TERM)
The OCR is raised
due to inflationary
a pressure!!!!!
AS
Price
Level
PL
P L1
Note: In the long-term
stable inflation rate may C + I + (X-M) falls
increase or decrease growth.
Overall increase as firms AD
areshifts to the
left!
able to predict prices and
enter into contracts.
Inflationary
pressure released
AD
Output/GD
P
AD1
Output
Output/GDP
FALLS!!!
Lesson Objectives
• Inflation and its relationship to
Fiscal Policy
Fiscal Policy
Governments planned budget for
revenue and spending to achieve its
economic goals.
Usually done yearly!
Government
Revenue
Remember:
Households
pay
income tax.
AD = C
(X-M)
Producers pay
company tax and
+ G.S.T.
I + GAlso
+ other
sales tax
Government spending makes up approx.
40% of AD!!
Government
pays transfer
payments and
for public goods
Government
pays for
subsidies and
for public goods
Government
Spending
Summary of all government
spending and Revenue
• Company tax
• Income tax
(P.A.Y.E)
• Indirect tax (G.S.T,
Sales tax)
• SOE dividends
(Kiwibank)
• Other income
(investments)
•
•
•
•
•
•
•
Transfer payments
Education
Defence
Health system
Police
Jails
Infrastructure
Fiscal policy to control
inflation
There are 2 types of fiscal policy a government can
run!!!
Collect more
Revenue than
Spending!!!
Spend more than
Revenue
collected!!!!
Fiscal policy to control inflation
To control inflation the
government must
either increase their
Budget Surplus or
lower their budget
Lower health
deficit! spending
Increase income
tax rates
Increase
company tax
rates
Increase G.S.T
Lower education
spending
Lower Police
spending
Consumption decreases
•Tax rates increased (reduced
disposable income)
Investment decreases
Note:
•Business confidence falls
An
expansionary
fiscal policy will
Government spending
causedecreases
Demand
•Contractionary fiscal policy,
budget surplus.pull inflation
AD
AD1
AS
AD
AD
Yf
2.5 Government
Lesson Objectives
• Understand the effect of
government policies on households,
producers, financial institutions and
government.
• Government spending/policies in
relation to growth
We need
to increase
growth!
Lets speed
production
up with
internet!
How will
this benefit
me?
How will this
benefit me?
Question.
• Increased government spending on
Broadband is an example of what
type of policy by government?
• Fully explain how increased
government spending on Braodband
could lead to economic growth?
In your explanation, include the
effects on productivity and output.
Answers
• the production of goods and services will be more
efficient / faster have a lower cost in these
sectors
• communication will be more efficient / faster /
have a lower cost in the economy so
• better educated / skilled labour force
• increased productivity, greater output so
• increased growth.
Government 2.5
Lesson Objectives
• Supply side Fiscal Policies
• Effect of supply side policies on
growth
Supply-side policies
Policies put in place to increase the productive capacity of an
economy.
AS
Price
Level
AS1
Lower inflation
Higher employment
Greater Growth
PL
AD
P L1
Output/
GDP
Output/ Output
GDP
Government Policies
HOW?
• Deregulation
• Privatisation
• Reducing
income tax
• Education and
training
Point!!!!
Improve
• Productivity
Price
• Efficiency Level
• Increase
output
• Economic
PL
Growth
AS
AS1
AD
P L1
Output/
GDP
Output/ Output
GDP’
Question
Fully explain how a capital gains tax could
increase economic growth. In your
explanation,
discuss how more investment in research,
equipment and staff training, rather than
property, could lead to greater growth.
Answer
• Capital gains tax will give people less incentive to
invest in investment properties.
• It will also increase the revenue government
would gain.
• Greater savings and tax revenue would be used in
investment towards research, equipment and
staff training. This would increase productivity /
productive capacity in the economy whereas
• investment in property would not generate the
same productivity / output gains
• so greater output if capital gains tax introduced
and growth would increase.
Government 2.5
Lesson Objectives
• Restrictions on Fiscal Policies to
promote Growth
• The Effect of Restrictions on
Growth
High Level of Debt
Fiscals Responsibilities Act 1994
Public Finance Act 2004
Requires that public debt must be reduced by
running operating surpluses
Prevents the sale of public assets to lower debt.
Resource Management
Act 1991
The RMA controls the use of
natural/cultural/historical resources to ensure long
term sustainability and minimise adverse
environmental effects.
Designed to promote sustainable management of
natural and physical resources.
Includes: water, soil, biodiversity, coastal
environment, noise, land use.
RMA in practice
Firm wishes to build
in Silverstream
Council assesses
damage to environ,
people, etc…
Firm builds
Put submission into
council (payment
required)
If accepted firm
pays cost of
assessment.
RMA Effects on business
AS1
Slows progress
Price
Level
AS
Can be a costly
process
May not be accepted
P L1
AD
PL
Output/
GDP,
Output/ Output
GDP’
Eden Park RWC upgrade
Amendment 2009
• The Resource Management Act 1991 was amended
in 2009 so that resource consents can be
processed more quickly. Some commentators
believed that the resource consent delays under
the original Resource Management Act had made
it harder to achieve high rates of growth.
Question
Fully explain how this amendment to the Resource
Management Act may have a positive effect on
economic growth. In your explanation, include:
• how delays under the original Resource Management Act may
have affected firms that were planning to expand or embark
on a new project
• how faster resource consents may have a positive effect on
economic growth.
Answer
• Long delays in approval of resource consents
would have increased costs and created
uncertainty for firms wanting to expand their
operations or embark on a new project.
• This may have resulted in some firms not
proceeding with their plans or reducing the size
of their planned expansion.
• Faster approval of resource consents would avoid
these increased costs and uncertainty, thus
resulting in more expansions and new projects
proceeding and so a positive effect on growth.
Employment Relations
Act 2000
Amendment
• Employers can put Employees on a 90
day trial period before a full
contract is offered.
• Discuss the effects of the
amendment on Employers,
Employees, Growth
2.5 Government
Lesson Objectives
• Policy responses to unforseen events
Policy reponses
Public Finance Act 2004
• The Government is offering
businesses tax credits to new
businesses. Explain the effect of this
policy on growth.
• (use the AD/AS model to help you
explain the effect)