Summary: When Jupiter Align With Mars

Interval Assessment Resource

Achievement Standard Economics 91227: Analyse how government policies and contemporary issues interact

Resource reference: Economic 2.6

Resource title: When Jupiter Aligns with Mars

Government policies are principles used to guide decisions to achieve desirable outcomes. The governments objective is to crease as high welfare as possible by contributing to a high level of sustainable economic growth and employed and for desirable outcomes for the economy benefiting everyone. Economic growth is an increase in the productive capacity of an economy. The overall objective of the Government’s policy is to create as high a level of welfare as possible by contribution to a high level of sustainable economic growth

. To ensure price stability is maintained the Reserve Bank adjust the OCR which influences prices in the economy. Price stability, which is when the purchasing power of money stays constant, is a desirable outcome of the government because inflation has several negative impacts on household and firms. Inflation erodes the values of households’ savings and causes those on a fixed income to lose purchasing power, the quantity of goods a set amount of money will buy. For firms, inflation causes cost or production to income since workers’ demand pay rises, as well as making it difficult to firms to plan for future. Inflation is an increase in general price levels and has undesirable impacts on households and firms which means the government is justified to use policies to maintain price

Prices are not distorted as people speculate for example with houses. Price inflation does have some negative effects on households. Firstly, inflation erodes purchasing power of savings. This means the purchasing power of your dollar goes down and services go up, as your savings buy less goods and services than they did before. It affects the distribution of real income, people on fixed incomes suffer as the purchasing power of their incomes decrease as price levels rise. Secondly, purchasing power od households on fixed income decline, as inflation tends to result in more unequal distribution of income as those on lower incomes find their wages do not rise as quickly as those on higher incomes. In times of high inflation household tend to purchase real assets that retain their real value since their prices rise faster than the inflation rate. Finally, another negative impact is the income tax earners suffer from fiscal drag pay rises to combat inflation put them into higher marginal tax brackets. This means as employees’ nominal wages increase with inflation their real wage (purchasing power of nominal wages) may remain constant. Since inflation reduces the incentive for households to save, it causes a shortage of savings for firms to borrow. Firms finance investment (the purchase of new capital goods) by borrowing money. Therefore, if there is not saving funds for investment will