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

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 Course notes quick navigation

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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Living standards

With respect to living standards, the implementation of any policy action is designed to improve the nation's overall living standards. This is because all policies (should) seek to ensure that the nation's resources are used in the best way possible such that living standards are maximised.  From this point of view, all policies should be compatible in the longer term.  However, there will clearly be occasions when policy combinations are employed that are seemingly at odds with some of the government's other economic goals. This takes place because policies involve trade-offs or costs which are the outcome of any cost-benefit analysis that is undertaken when policies are formulated. This means that primacy will often be given to the achievement of one goal over another.  For example, the government's very expansionary budgetary and monetary policy measures over 2008-9 helped to maintain stronger growth and employment.  However, they added to inflationary and external pressures.  Similarly, over 2012-3 the government introduced the Clean Energy legislation (with the carbon tax as the centerpiece and due for repeal in 2014) which was designed to protect our long term prosperity and welfare.  However, by increasing production costs across the economy, it conflicts with government efforts to achieve its goals of strong growth, full employment and low inflation in the short to medium term.

On balance, policy makers believed that both the stimulus measures from 2008-9 and the Clean Energy legislation (and a whole host of other policy initiatives) were the best policies to employ in order promote Australia's economic prosperity or living standards. That is, the benefits of pursuing expansionary budgetary and monetary policies outweighed the costs; and the costs of taking no action to protect against excessive C02 pollution were too high relative to the benefits gained from early intervention via the Clean Energy legislation.

However, it is important to keep in mind a point mentioned earlier in relation to budgetary policy weaknesses. That is, the political cycle tends to result in some policy actions that are indeed not in the nation’s long term interests, but instead are designed to attract votes and maintain power. Arguably, the eventual decision to repeal the carbon tax in 2014 is an example.

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