The policy mix   Strong & sustainable growth   Low inflation  Full employment  External stability   Equity in disribution of income   Living standards

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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Policy mix:  External stability

With respect to external stability, the policy mix used to achieve this goal has changed.  It was once the case (e.g. in the late 1980s) that monetary policy was an important part of the policy mix.  However, the RBA discovered that tight monetary policy (to reduce the CAD and NFD via a containment of national spending or GNE) was having conflicting impacts on the external sector.  On the one hand, the higher interest rates would tend to reduce import spending (or GNE) and help to contain pressure on the CAD.  On the other hand, higher interest rates tended to appreciate the AUD and reduce the international competitiveness of Australia’s tradables sector (thereby reducing net exports and increasing the CAD).  Monetary policy’s role is now limited to assisting with the achievement of external stability in the longer term via the achievement of low inflation (and its impact on international competitiveness).  In addition, it has a key role to play in ensuring that the value of the AUD does not become too volatile (or diverges too far from its fundamental value).

Today, the role of achieving a more externally stable economy is left to the combination of budgetary policy and/or supply side policies, including the benefits of MRPs over time.  These policies are used to either:

National savings can be lifted via the medium term budgetary policy strategy to achieve budget surpluses on average over the course of the economic cycle, as well as other specific measures that will help to raise national savings.  This includes superannuation tax concessions and tax breaks on savings more generally.

Increasing Australia’s share of world income can occur via the improvement in international competitiveness that comes from various MRPs, or specific export promotion, such as export market development grants.  

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