Hi Brett I just wanted to say thank you so much for making these videos. My ATAR would be doomed if it weren’t for them 😅. For Question 7, you stated that raising the tax-free threshold would lift household consumption and that this would lead to an increase in equity in income distribution. Yet, I don’t understand how this could be the case: While the rise in the threshold would stimulate spending (as disposable income increases), how does this lead to a more equitable income distribution? Is it wrong to assume that T would decrease and as a result, the government would have less funds to go towards welfare payments (G)? The purpose of a progressive tax system is to ensure that large tax bills are paid by those who can (high-income earners) so that extra support (welfare payments) can be given to those who need it (low-income earners). Wouldn’t a rise in the threshold hinder this process? Do we assume that all the tax brackets move up by a fixed amount or is it only the threshold that is increased (and other tax brackets stay the same?). Also, the answer to Question 8 involves stimulating the economy to encourage spending on domestic goods and services. Assuming “stimulating the economy” here refers to greater injections (G) (I make this assumption as the question asks for a FISCAL strategy), would that not make the issue (of the growing deficit in the current account) worse in the short term? Your answer used decreasing imports and increasing domestic production as a rationale. How would this be accomplished by a fiscal strategy? Furthermore, I’m noticing that applying certain mindsets/ rules can go a long way in making these questions simpler to answer. For example, I’ve noticed that the causality featured in the MC questions focuses mainly on the short term (i.e., if this happens, how would this other thing be impacted?). Do you know of other useful mindsets that assist in answering these MC questions? Again, thanks for your help
Hi , and thanks for your questions. I'm pleased that you've found the videos helpful. I hope I can help you navigate through these MC solutions Overall , just remember that in MC questions you are looking for the "answer of best fit". To be fair, the MCQs in the exam are presented in different formats to give everyone a chance at answering .... Q7 : You are right about the tax free threshold not necessarily leading to income equality, however through process of elimination , it's really the only answer left. Reviewing my annotations I used in the video , I put a question mark against this answer , but the others get eliminated so it is last answer standing. Regarding your bigger issue on philosophy of progressive tax, you mention high income earners paying more tax....., but the other way to consider progressive tax is to ensure that lower income earners get a greater proportion of their (relatively lower) earnings in their pocket, so that they have $$ to spend. Tax thresholds are generally adjusted to keep pace with increases in wages, and to ensure that those who are earning near the top of a tax bracket don't get slugged with a higher marginal tax rate on the additional income that might result from increase in wages (for essentially performing the same work). Q8: you are right that there could be some negative consequences in current account from fiscal stimulus ... BUT ... just make sure that you stick to the parameters of the question - you only have to pick one of the four answers. C and D are fundamentally wrong. B should be considered , but the problem with B is that trade liberalisation (reducing barriers to import to Aust) would likely lead to increase in imports , thus CA would erode further . So BEST FIT is answer A : stimulate the economy (it doesn't matter how - it could be through say regulatory changes which wouldn't impact govt spending) , encourage purchase of domestic goods , and thus improve Balance of Trade / BOGS My mindset with multiple choice is that generally two answers are theoretically wrong, then I just have to find the best application of theory to the scenario to find the "best fit" , and leave all my other knowledge of the 'what if's' that economics throws up out of my thinking .... keep a target on the ceteris paribus .... See my other videos for writing strategies and structures for short and extended response questions !
For question 10, would fiscal policy be contractionary due to automatic stabilisers with higher overall taxation/ why is it more likely to be contractionary than expansionary?
Hi Mik, so this is a really tricky question. In the video I show the calculations to demonstrate a decrease in UE rate from around 5% to around 3%. We know that when UE rate falls, then there is the increase in T, and decrease in G (less welfare payments). Hence automatic stabiliser would be contractionary. Why not expansionary ? Well, I guess you have to put on your 'ceteris paribus hat'. All we know is that employment data has shifted - we don't know what caused it, or any reason for previous government fiscal interventions or measures. So we have to take the "most correct" answer, which is C. It helps to keep it simple and cut through all the "what if's". Here is a good video summarising the concept of Occam's Razor , that can help you get that cut through : ruclips.net/video/QZBRVqml7fA/видео.html
Hi, the higher the MPS, the lower the level of income (Y) that will be directed back towards consumption. In circular flow model a higher MPS = bigger leakage. So if an economy has high levels of savings, a decrease in cash rate will have a proportionately smaller effect seen in additional consumption than an economy with low MPS. We don't assume that the high MPS economy would pull money out of savings when cash rate drops - that would be outside scope of question. Also remember back to COVID lockdown times, where average household savings reached above 20% of income for a short period of time: a drop in cash rate during this time didn't have much impact in economy as people couldn't spend the additional disposable income (as a result of cash rate / mortgage decreasing) as shops, cafes restaurants etc were closed. So it would take longer for that transmission to be seen in economic data .... FWIW RBA reckons it takes 12 - 24 months to see transmission of cash rate changes in economy
Legend
@Brettonomics Giving Picasso a run for your money with that drawing of the snail. Your videos saved me
goated
Absolute legend. Carrying our atar for real
Fr
Hi Brett
I just wanted to say thank you so much for making these videos. My ATAR would be doomed if it weren’t for them 😅.
For Question 7, you stated that raising the tax-free threshold would lift household consumption and that this would lead to an increase in equity in income distribution. Yet, I don’t understand how this could be the case: While the rise in the threshold would stimulate spending (as disposable income increases), how does this lead to a more equitable income distribution? Is it wrong to assume that T would decrease and as a result, the government would have less funds to go towards welfare payments (G)? The purpose of a progressive tax system is to ensure that large tax bills are paid by those who can (high-income earners) so that extra support (welfare payments) can be given to those who need it (low-income earners). Wouldn’t a rise in the threshold hinder this process? Do we assume that all the tax brackets move up by a fixed amount or is it only the threshold that is increased (and other tax brackets stay the same?).
Also, the answer to Question 8 involves stimulating the economy to encourage spending on domestic goods and services. Assuming “stimulating the economy” here refers to greater injections (G) (I make this assumption as the question asks for a FISCAL strategy), would that not make the issue (of the growing deficit in the current account) worse in the short term? Your answer used decreasing imports and increasing domestic production as a rationale. How would this be accomplished by a fiscal strategy?
Furthermore, I’m noticing that applying certain mindsets/ rules can go a long way in making these questions simpler to answer. For example, I’ve noticed that the causality featured in the MC questions focuses mainly on the short term (i.e., if this happens, how would this other thing be impacted?). Do you know of other useful mindsets that assist in answering these MC questions?
Again, thanks for your help
Hi , and thanks for your questions. I'm pleased that you've found the videos helpful. I hope I can help you navigate through these MC solutions
Overall , just remember that in MC questions you are looking for the "answer of best fit". To be fair, the MCQs in the exam are presented in different formats to give everyone a chance at answering ....
Q7 : You are right about the tax free threshold not necessarily leading to income equality, however through process of elimination , it's really the only answer left. Reviewing my annotations I used in the video , I put a question mark against this answer , but the others get eliminated so it is last answer standing. Regarding your bigger issue on philosophy of progressive tax, you mention high income earners paying more tax....., but the other way to consider progressive tax is to ensure that lower income earners get a greater proportion of their (relatively lower) earnings in their pocket, so that they have $$ to spend. Tax thresholds are generally adjusted to keep pace with increases in wages, and to ensure that those who are earning near the top of a tax bracket don't get slugged with a higher marginal tax rate on the additional income that might result from increase in wages (for essentially performing the same work).
Q8: you are right that there could be some negative consequences in current account from fiscal stimulus ... BUT ... just make sure that you stick to the parameters of the question - you only have to pick one of the four answers. C and D are fundamentally wrong. B should be considered , but the problem with B is that trade liberalisation (reducing barriers to import to Aust) would likely lead to increase in imports , thus CA would erode further . So BEST FIT is answer A : stimulate the economy (it doesn't matter how - it could be through say regulatory changes which wouldn't impact govt spending) , encourage purchase of domestic goods , and thus improve Balance of Trade / BOGS
My mindset with multiple choice is that generally two answers are theoretically wrong, then I just have to find the best application of theory to the scenario to find the "best fit" , and leave all my other knowledge of the 'what if's' that economics throws up out of my thinking .... keep a target on the ceteris paribus .... See my other videos for writing strategies and structures for short and extended response questions !
For question 10, would fiscal policy be contractionary due to automatic stabilisers with higher overall taxation/ why is it more likely to be contractionary than expansionary?
Hi Mik, so this is a really tricky question.
In the video I show the calculations to demonstrate a decrease in UE rate from around 5% to around 3%. We know that when UE rate falls, then there is the increase in T, and decrease in G (less welfare payments). Hence automatic stabiliser would be contractionary.
Why not expansionary ? Well, I guess you have to put on your 'ceteris paribus hat'. All we know is that employment data has shifted - we don't know what caused it, or any reason for previous government fiscal interventions or measures. So we have to take the "most correct" answer, which is C.
It helps to keep it simple and cut through all the "what if's". Here is a good video summarising the concept of Occam's Razor , that can help you get that cut through :
ruclips.net/video/QZBRVqml7fA/видео.html
@@Brettonomics Thank you!
Can you explain why a higher marginal propensity to save causes monetary policy to have a longer time lag (be less effective)?
Not funny
Hi, the higher the MPS, the lower the level of income (Y) that will be directed back towards consumption. In circular flow model a higher MPS = bigger leakage. So if an economy has high levels of savings, a decrease in cash rate will have a proportionately smaller effect seen in additional consumption than an economy with low MPS. We don't assume that the high MPS economy would pull money out of savings when cash rate drops - that would be outside scope of question.
Also remember back to COVID lockdown times, where average household savings reached above 20% of income for a short period of time: a drop in cash rate during this time didn't have much impact in economy as people couldn't spend the additional disposable income (as a result of cash rate / mortgage decreasing) as shops, cafes restaurants etc were closed. So it would take longer for that transmission to be seen in economic data .... FWIW RBA reckons it takes 12 - 24 months to see transmission of cash rate changes in economy
agreed .... let's keep it respectful here folks .... you are all at the end of a long haul