The Macro Economic Policies Of Australia

Australian government authorities over precedent years have conventionally targeted towards including triangular objectives of financial development, home poise, and external poise within construction of single overall economy. (DORNBUSCH, Rudiger, 2006) Collectively, these trio group of objectives aim towards sustaining nationalized financial growth while retaining inferior inflation as well as restricting the mass of international debts and liabilities. Several studies conducted in concerned field have uncovered that there surely is no consistency in level of economic progress though; it is affected greatly by fluctuations of international business circuit. (DORNBUSCH, Rudiger, 2006) A governmental macroeconomic management is known as an attempt to reduce the impact of international business fluctuations by controlling demand to aid sustained growth as well as inferior inflation and unemployment.

In the last decade macroeconomics policy in Australia has been directed at managing inflation as it would be associated with macroeconomic balance and expansion.

Following on from the GFC's the government's main emphasis of macroeconomic coverage has been trying to avoid a recession.

Contrast these two phases of insurance policy. Explain how macroeconomic insurance plan objectives, focuses on and instruments have differed.

Explain how macroeconomic policy objectives, goals and devices have differed.

Outline the encounters of the Australian Overall economy during the last 10-15 years making use of macroeconomic aggregates - these may be shown in summaries of furniture and/or graphs. Stress should be positioned on the difficulties facing coverage makers at present and likely problems.

Before the global economic problems (GFC), the Australian current economic climate has seen significant growth in terms of GDP overlooking various crises that contain affected the global economy like the Asian financial crises (1997-1998) and the United States (US) 'dot com' bust (2000) (guide). Throughout this time around, Australian macroeconomic insurance plan (MP) has generally been directed at controlling inflation to keep up stability and growth. MP refers to the structure, performance, behavior and decision making of a complete economy. (Reference point) claims that MP is from the analysis of aggregates such as gross local product (GDP), price indices and unemployment rates to examine how the current economic climate functions.

Macroeconomic Policy

The continuance of a reliable economic environment in Australia post GFC has proven to be a difficult activity, with the surfacing of undesired inflation and external account stresses (Treasury, 2008). Matching to Treasury (2008) serves of coverage to take on such pressures has consistently added to short-term downturns and, unavoidably, constrained the prolonging of economical growth. The foundation of the issue, however, is the policy failure which allowed the pressures to seem. Nevertheless, the causing changes in the economical outlook would affect the self-assurance of businesses and consumers and their readiness to activate along the way of structural change. Furthermore, disparity in fiscal plan and hesitation about inflation predictions has lead to raised real interest levels, discouraging investment and distorting investment habits.

In the last few years substantial improvement has been made in addressing inflation and a lesser degree current bill deficit constraints (RBA, 2009). The existing routine has been characterised by low inflation, with economic policy being carried out on a far more tactical basis with the desire to keep primary inflation constant with the Reserve Bank or investment company of Australia's (RBA) average concentrate on range of 2-3 3 % over a every year cycle.

Last year the federal government introduced a new platform for the do of policy, evidently recognising the Reserve Bank's role and endorsing its inflation aim. The clarification of insurance policy responsibilities, and acceptance of their observance used over time, as well as an accumulating record of low inflation, will probably have a continuing positive effect on lowering inflation targets and creating confidence in a sound investment environment.

Australia's large structural current profile deficit reflects both limited national saving and inadequate investment returns overall (ABA, 2009). In the saving side, the main cause is a deficiency in public saving especially at the Commonwealth level. The Government through its fiscal loan consolidation program is addressing this problem and has put in place a policy framework that will keep up with the adequacy of the Commonwealth contribution to general population saving. Assertions 1 and 2 explain in detail the fiscal strategy, including advanced transparency and accountability procedures, and implementation of the strategy in the years forward. The good thing about a far more soundly structured fiscal policy is likely to be seen as time passes in the capability of the market to sustain faster rates of growth than would normally be the truth. While it is too early to be able to point to any concrete results confidently, the 1997-98 monetary outlook presented in Statement 2 shows that higher saving in prospect next financial year will constrain the existing account deficit.

Before the global economical turmoil of 2007 the Australian market sustained increased economical growth of approximately 8% per annum - aside from the year 1997-1998 (Asian financial crisis) (The Australian 12 months Booklet 2008). This resilience reflects on well-timed economic and fiscal policy reactions; strong demand from various major trading lovers, such as China; increased populace progress that aided demand in the home market; and the robustness of the financial sector (The Australian Yr Book 2008). More generally, Australia's strong economical performance can be commended by generations of economical reform - in monetary policy, regulatory frameworks and governance. These have increased the overall flexibility of the current economic climate, and strengthened its capability to withstand unforeseen circumstances.

Dungy and Pagan (2007) claim that aggregate behaviour is present between fiscal regulations and is connected

Since 1997/98 the federal budget has been around surplus continually, apart from a very small deficit in one 12 months. The government's net debt has been retired. Gross debt on concern is maintained at a small size to be able to help a functioning relationship market to be able to allow reliable risk costs more generally. As with monetary policy, there is a medium-term platform for fiscal insurance plan emphasising balance over the business cycle. There is much less inclination today than there was previously to use fiscal policy as a counter-cyclical stabilisation tool.

Significant fiscal difficulties in the long-term include health spending and responding to populace ageing, as the very important work by officials of the Australian Treasury has clarified.

Macroeconomic plan has a supportive and complementary role in providing a well balanced economical environment conducive to appear investment decisions by business and to encouraging workers to invest in replacing their skills to consider advantage of new occupations.

Macroeconomic aggregates are:

Aggregate behavior: human relationships between economical aggregates such as national income, government costs and aggregate demand. For example, the ingestion function is a relationship between aggregate demand for consumption and aggregate disposable income.

Models of aggregate behaviour may be derived from immediate observation of the economy, or from types of individual behaviour. Ideas of aggregate behavior are central to macroeconomics.

Aggregate demand: aggregate demand (Advertising) is the total price for demand for last goods and services in the economy (Y) at a given time and price level [1]. It's the amount of goods and services throughout the market that will be purchased at all possible prices. [2] This is the demand for the gross domestic product of a country when inventory levels are static. It is called effective demand, though at other times this term is distinguished.

It is often cited that the aggregate demand curve is downward sloping because at lower price levels a greater quantity is demanded. While this is correct at the microeconomic, sole good level, at the aggregate level this is wrong. The aggregate demand curve is actually downward sloping as a result of three distinct effects; Pigou's wealth effect, the Keynes' interest rate result and the Mundell-Fleming exchange-rate impact.

Aggregate expenses: is a way of measuring national income. It really is a way to gauge the GDP or Gross Home Product (A way of measuring the level of economic activity). It really is defined as the worthiness of organized goods and services produced in an current economic climate.

GDP is determined by the solution C + I + G + NX and I = Ip + Iu (designed + unplanned investment), Aggregate Expenses is thought as C + Ip + G + NX, where:

C = Ingestion Expenditure (Can also be written as CE)

I = Investment

G = Government spending

NX = Online exports (Exports-Imports)

Aggregate supply

Aggregation problem

Effective demand:


Government Macroeconomic goals:

High and secure economic growth rates

Low unemployment

Low inflation

Stable and workable Balance of Payments

RBA article:

RBA uses short-term interest as its working instrument for utilizing monetary insurance policy.

RBA sets goal level because of its cash rate.

RBA has two options

It can concentrate on particular level of lender reserves and allow the resulting final result for short term interest rates

It can seek to attain a particular goal level for short-term and offer whatever quantity of services is demanded at the prospective rate.

For confirmed demand curve for reserves the RBA should alter the way to obtain loan provider reserves to implement a change in the stance of monetary policy.

While banks continue to keep reserves with the RBA these reserves are associated with negotiation in the payments system. Furthermore the RBA pays interest on reserves which is linked to the cash rate.

An important effect on the current operating method is the partnership between the level of reserves and the level of the policy rate.

Monetary insurance plan operating procedures is dependant on the way to obtain and demand for some measure of the amount of money supply.

Systematic changes to the stance of monetary policy need to be carried out by changing the way to obtain loan provider reserves.

Central finance institutions can effect the stock of standard bank reserves by executing open market functions either directly with the banking system or with the non-bank public.

A central standard bank struggles to independently determine both quantity of loan company reserves and their price.

To understand how the RBA achieves its concentrate on for the cash rate it's important to consider the procedure of the payments system in Australia and the in a single day cash market.

In Australia the major players in the payments system are the nonbank community (homeowners and organizations), the private banks, the RBA and the government.

The style in unemployment in the most recent ten years has generally been downward. Carrying out a rise of a percentage point in the economical slowdown in 2001, they have fallen to the lowest levels because the middle 1970s. The long enlargement, with occasional temporary pauses, has done a lot to foster lower unemployment. However the changes in labour market agreements within the last 20 years roughly have also been very important. Indeed, I would argue they are a key contributor, not least because they have got facilitated the longer amount of monetary expansions.

http://www. bis. org/review/r080516b. pdf?noframes=1

Firstly, as is broadly accepted, duty systems must be fiscally sustainable across the economic cycle. Second, while monetary insurance policy is the principal device of macroeconomic management, it continues to be necessary to continue to be mindful of the short-run "liquidity" effects of fiscal policy

The challenges associated with an increasing age population identified in the Intergenerational Statement have prompted the Howard Federal to determine a long-term technique to put fiscal policy on a far more sustainable footing. Central here was the creation of an independently monitored "Future Finance" in 2006 to help meet the costs associated with Australia's maturing population. The primary goal of the Future Fund is to accumulate enough capital to meet up with the Commonwealth's unfunded $91 billion superannuation responsibility so that it does not load future generations. THE NEAR FUTURE Fund has been capitalised from a number of resources including property sales, special seed money (designed in part to protect sovereign debt markets) and budget surpluses from the government's cash account. While the Future Finance is primarily about fiscal sustainability rather than stabilisation by itself, it's important to note that the composition of the Future Fund and the allocation of surpluses to it do have some important implications for the stabilisation argument. The significant point here's that the Future Fund symbolizes an impressive vehicle in which cash surpluses can be invested without stimulating short-run ingestion.

Overall recent Australian fiscal insurance policy has been consistent with the aims lay out in the Charter, in that fiscal coverage is clearly being conducted on the ecological basis with significant money now being committed to the Future Finance.

What is less clear, however, is the impact of the policy on the goal of macroeconomic stabilisation and whether the challenges currently confronting the Australian overall economy may require more consideration of the impact of fiscal coverage on short-run monetary activity.

Given the political sensitivity of the problem and the RBA's understandable reluctance to speak outside its formal mandate, the central lender has not been willing to provide the authorities with explicit advice on fiscal insurance policy. Indeed the new RBA Governor, Glenn Stevens, attempted to down-play the issue at a February 2007 Parliamentary Committee hearing when he stated that it was improbable any election spending spree would have enough short-term impact to enter the RBA's interest rate calculations (Wood 2007).

Activist fiscal policy of the Keynesian "golden age" may well have handed down, with monetary plan now proven as the primary device of macroeconomic management. Yet this does not mean that we can completely ignore the stabilisation function of fiscal insurance policy which Musgrave identified almost half of a century ago. That is especially so when, as in the event in Australia at present, key sectors of the economy are operating at near full capacity and inflationary risks are building. Under these situations fiscal policy must not only be lasting, it must be sensitive to its potential to stimulate demand in the short-run. Luckily, for the Australian market it seems that there is an awareness of the necessity to exercise a amount of fiscal restraint in the prevailing conditions with both major get-togethers.

http://eprints. utas. edu. au/3970/1/3970. pdf


Australia's populace is projected to reach practically 36 million by 2050 - an increase of around 14 million

The first obstacle is that an ageing population implies slower economic expansion. As the percentage of the populace that is of traditional working age falls, the labour push contribution rate is projected to fall (from above 65 per cent today, to below 61 per cent over another 40 years), dampening labor force growth.

Population dynamics clarify one-half of the 0. 4 ratio point distance between annual development in GDP per capita over another 40 years relative to the past 40 years - the spouse being scheduled to a complex assumption relating to productivity growth.

The second task is that working Australians should support an ageing society that, partly due to continuing technological advancements, may very well be living much longer. Men aged 60 in 2050 are projected to live a life an average of 5. 8 years longer than someone aged 60 today, while women aged 60 in 2050 are projected to live a life typically 4. 8 years much longer.

This is excellent news for Generation Y, but a sobering statistic for future costs.

The better publicly funded health, aged care and related expenditures to support Generations X and Y in their pension years will need to come from a comparatively smaller number of workers than we've today. Over a "no plan change" basis, a significant fiscal space is projected.

The intergenerational survey shows how the Government's fiscal technique to constrain real expenditure growth contributes to lowering, without wholly getting rid of, the projected fiscal gap.

The third task recognized in the intergenerational survey concerns the impact of climate change on ecosystems, water resources, agricultural production and weather patterns.

Against these challenges, there are three topics I wish to say something about today:

Promoting economic expansion by improving efficiency and workforce participation;

The implications of an evergrowing population, particularly for infrastructure investment; and

Medium-term potential customers for capital moves required to finance national investment.

For apparent reasons, I will not be saying anything about climate change at this juncture.

Discuss the concept of instruments and focuses on in macroeconomic insurance plan and assess how this idea of devices and focuses on in macroeconomic insurance plan and determine how this idea might be applied to the current policy framework in Australia.

A number of individuals have asked me for clarification on devices and focuses on as referred to in project 2. This is what I mean:

These make reference to macroeconomic insurance policy.

INSTITUTIONS make policy. Examples is the Reserve Bank of Australia and the Treasury.

These institutions placed policy TARGETS. A good example of such a target would be an twelve-monthly inflation rate of no more than 3%.

Policymakers then use insurance plan INSTRUMENTS to meet the targets. Typical tools are the RBA cash rate or government spending.

Show the way the economic theory you have learnt may be used to clarify current macroeconomic insurance policy.

How is inflation measured?

GDP Deflator

Consumer Price Index: typically the prices of the goods and services purchased by the typical urban category of four.

Producer Price Index: An average of the costs received by companies of goods and services in any way periods of the creation process

fiscal and monetary policy

The tools the Australian authorities controls to gentle short-run fluctuations in the economy

inflation, unemployment and exterior trade

The triggers and ramifications of inflation, the link between inflation and unemployment, Australian trade with the rest of the world

Fiscal coverage:

Fiscal coverage" is the federal government operation of federal government spending (G) and taxes (T).

Typically we consider the situation of the way the government can change G and T in order to control economic factors such as result, inflation, interest levels, etc.

Issues: how fiscal policy can "stabilize" the overall economy? what about federal government borrowing and public debt?

Budget deficit: the budget deficit is the amount of overspending by the government

Budget deficit = G - T

Expansionary fiscal policy: increasing the budget deficit (G ' or T ") usually in a recession.

Contractionary fiscal plan: reducing the budget deficit (G " or T  ') usually within an economic growth.

Budget deficits and surpluses

If the government spends more than it earns in taxes, what goes on? (G > T)

The money must come from anywhere. For developed countries, this means borrowing (issuing federal government credit debt or "public debt") from domestic residents or foreigners.

If the federal government is spending less than it brings in in taxes, the federal government can reduce general public arrears. The Australian federal has implemented this policy in the last a decade.

Types of fiscal policy

We differentiate two types of fiscal plan:

Discretionary fiscal coverage: That is fiscal insurance policy that comes about from designed changes in G and T that the federal government brings in response to the economic situation.

Non-discretionary fiscal insurance policy: That is fiscal coverage that comes about from the design of spending and fees. There is absolutely no government official positively determining these changes.

Non-discretionary fiscal policy

Certain parts of our spending and taxes automatically increase demand in a recession (when Advertisement < potential GDP) and decrease demand in a increase (when AD > potential GDP).

Welfare spending and unemployment benefits are part of G and increase in a recession and decrease in a growth.

Income and company taxes are part of T and be based upon GDP, they increase during a boom and reduce throughout a recession.

These become "automatic stabilizers" on the overall economy, minimizing the variability of the market.

Cyclically-adjusted budget deficits

The automated stabilizers improve the budget deficit in a recession and lower the budget deficit in a increase.

This simple fact means that people can not only look at the budget deficit to ascertain whether the federal is "overspending", we also have to consider where were available cycle.

Adjusting the budget deficit for the idea we are available cycle is named "cyclically altering". We would expect a good "sensible" administration to maintain a deficit in a recession.

Discretionary fiscal policy

Discretionary fiscal coverage is the manipulation of G and T by federal officials typically to reduce the severity of shocks to the market.

It appears like a good idea, but so how exactly does it work the truth is?

There are extensive problems and restrictions to the use of fiscal plan to lessen recessions and booms.

Problems with discretion

Scenario: Think about a train drivers that has only one control- an accelerator/brake that he / she can push or pull on to control the teach. This is often the same situation as the government encounters with fiscal insurance policy.

Now what limitations can the coach drivers face?

Problems with discretion


Correctness of data: May be the train driver witnessing the tracks correctly? Or Does the government obtain the right data about where the economy is?

Timing of data: Is the train driver experiencing the monitors with plenty of time to behave? Or Does the government get the statistics quickly enough to do anything?

Decision lags: Can the teach driver make a decision about the right action prior to the train reaches the situation spot? Or does the government have time to create the correct fiscal insurance plan?

Problems with discretion

Administration lags: In case the driver pulls on the control, the length of time does it take for the brakes to learn to work? Or New spending and taxes need to be approved through parliament, which takes time, even after having a decision is manufactured.

Operational lags: If the brakes learn to work, how a long time before the train decreases? Or New administration spending and fees take time to affect the economy.

So even the best-designed fiscal procedures can go wrong if they're in response to the wrong data or if indeed they take too long to have an effect on the economy.

Political considerations

There are further concerns we may have about the procedure of fiscal coverage.

Politicians have to remain popular. Nobody likes fees, and everyone desires new spending on themselves. Will a politician make an unpopular decision that may lead to them getting rid of the election if it is the best decision for the current economic climate.

Electoral cycles: Government authorities need to be re-elected every 3-4 years. So a politician would wish to engineer a increase right before his / her election.

Crowding out

Another problem with fiscal insurance plan is that an upsurge in G may increase productivity but at the trouble of other the different parts of aggregate expenses.

Y = C + I + G + NX

Since the market returns to potential GDP on the long-run, a rise in G must come at the trouble of either C, I or NX or all 3.

If an increase in G reduces investment spending over the long-run, this may lead to lessen future growth in the economy.

Crowding out

How can this happen?

An upsurge in G shifts the AD curve to the right.

This results higher Y and higher P.

The increased authorities borrowing searching for savings boosts the interest.

Higher interest levels lead to lessen investment spending so I drops, shifting Advertising left.

Higher interest rates contributes to an appreciation of the A$ (as overseas investors put their money in Australia), so NX drops, moving AD left.

Crowding out- I and NX

Government debt

One problem that economical commentators always point to is the level of government arrears- "Our credit debt is too much. "

How do we evaluate the level of federal government debt? Just how do we know is it is "too much".

Government debt is like another form of credit debt. You evaluate the debt relative to the income/prosperity of the individual incurring your debt.

A $500, 000 credit debt might be high to you and me, but it might mean nothing to Kerry Packer.

Government debt

So we need to evaluate government arrears in accordance with "government income". But what is the correct form of "government income", as the federal government doesn't earn or produce anything.

Generally we use the income of the united states as the comparability, since the government is absolve to tax or claim any part of GDP.

Government debt

So our criterion for "too much" is credit debt (B, since typically government debt is granted in federal government bonds) over GDP (Y):

B / Y

Banks would make much the same calculation when contemplating whether to concern someone a home loan.

In general personal debt keeps growing at the rate of interest every year, r, while GDP is growing at the expansion rate of the economy, g.

Monetary policy

Firstly, monetary insurance plan uses the level of interest levels to influence the overall economy in the brief to medium term. Its major goals are to stabilise demand and inflation in the medium term and inflationary objectives also to achieve the government's aims of sustainable growth with underlying inflation of about 2-3%.

Source: Chapter 12 of the book plus second part of Module 3.

"Monetary policy" is the government operation of the money supply and interest levels.

Typically we consider the challenge of the way the government can change monetary policy to be able to control economic variables such as productivity, inflation, interest levels, etc.

Issues: how financial insurance policy can "stabilize" the overall economy? how will monetary policy affect interest rates or exchange rates?

Who operates economic policy?

The Reserve Lender of Australia (RBA) is accountable for monetary insurance policy.

The RBA was given 3 goals when it was made:

Maintain low inflation

Maintain low unemployment

Maintain value of the A$

The RBA was only given one coverage tool- the money supply to attain 3 goals. Within the mid 1990s, the RBA was simply informed to possess one target:

Maintain low inflation.


The RBA implements monetary policy through its control of the cash rate.

Cash rate: The money rate is the speed the RBA charges bank or investment company for loans within the RBA reserves system. The cash rate is the bottom interest for the current economic climate, and all the interest rates derive from it.

Easy monetary insurance plan: When the RBA lowers the money rate to promote AD.

Tight monetary insurance plan: Once the RBA raises the cash rate to cut off AD.

Interest rates

As we noticed in the Investment section, the success of investment jobs will depend on the nominal interest.

The lower are interest levels, the more jobs will be profitable, so the higher will be investment spending.

Since the RBA manages the cash rate, and since all interest rates depend on the money rate, the RBA handles I, therefore can transfer the Advertisement curve.

How monetary plan works

Cause-Effect String of Monetary Insurance policy:

Money supply influences interest rates

Interest rates affect investment

Investment is a component of AD

Equilibrium GDP is changed

Monetary coverage and the open economy

Net Export Effect

Changes in interest affect the worthiness of the exchange rate under floating exchange rate.

An increase in interest appreciates the currency, leading to lower net exports

A reduction in interest rate brings about money depreciation and a rise in world wide web exports

So a simple monetary plan is improved by the net export result.

Quantity theory of money

There is a good, simple model of money which explains many features of money supply and demand. This model is named the quantity theory of money.

If we imagine that money is necessary for all of the purchases made each year, then demand for money is the vale of acquisitions: PY.

The way to obtain money for acquisitions is the quantity of cash in the overall economy.

But each piece of money in the overall economy can be used multiple times during a year in trades. We call the number of transactions the velocity of money "v".

Quantity theory of money

So the total supply of money for transactions in a calendar year is v times M: vM.

So demand equals supply requires that:

PY = vM

So if Y goes up, but little or nothing else does, then average degree of prices must fall.

The QTM is good to utilize for considering money and inflation.


A person becomes unemployed:

Job loser

Job leaver

New entrant or re-entrant in to the labour force

He or she actually is no longer unemployed:

Hired or recalled

Withdraws from the labour force

Labour force contribution rate

Unemployment rate

Types of unemployment

Three main types of unemployment:

Cyclical unemployment

Frictional unemployment

Structural unemployment

Cyclical unemployment

Associated with the fluctuations of the business enterprise cycle

Takes place anticipated to inadequate aggregate demand or total spending- reflects shifts in AD curve.

High during recessions and low during booms.

Fiscal and financial guidelines can reduce cyclical unemployment - insurance policies are relevant.

Frictional unemployment

Associated with the time frame where people are trying to find careers, being interviewed and holding out to commence obligations.

It is unavoidable and always exist

Fiscal and economic policies cannot reduce frictional unemployment - macroeconomic insurance policies are irrelevant.

Policies which make it much easier to find new jobs will influence frictional unemployment.

Structural unemployment

Associated with wider structural or scientific changes throughout the market that could make some jobs redundant.

It is inescapable and always exist

Lasts much longer than frictional unemployment

Fiscal and monetary policies cannot reduce structural unemployment - macroeconomic procedures are irrelevant.

Policies that encourage employees to retrain skills or even to move to a new area with an increase of jobs will decrease structural unemployment.

"Full" employment

Full work means when all beneficial resources in the economy are completely use - suggests no cyclical unemployment - still frictional and structural unemployment exist - they could be low - but can never be zero.

The full-employment rate of unemployment is called the "natural rate of unemployment".

Domestic output constant with the natural rate of unemployment is "potential end result" or "full career degree of GDP".

Classical employment theory

Economy always functions under full work - it is computerized and self applied sustaining - if there is any unemployment that is merely temporary.

Price-wage flexibility

the assumption that all prices, including salary and interest rates, are flexible and can, rapidly adjust to remove disequilibria

Classical theory and laissez faire

the price system ensured that price-wage overall flexibility and fluctuations in the interest was capable of retaining full employment

Classical theory

Keynesian work theory

Full employment is not automated - unemployment is out there for longer times - the fantastic Depression of the 1930s - sticky wages and prices.

Horizontal aggregate supply curve during recession - 'recessionary' or 'Keynesian' range.

Change in AD influences on unemployment - not on price level.

Once the full career level is come to - vertical AS curve - change in AD influences price level only.

Unstable aggregate demand - especially investment, so that demand management and stabilisation policies by the federal government are essential.

Keynesian theory

Measuring inflation

We gauge the standard price level through a cost index such as the Consumer Price Index (CPI)

Inflation is a continuous rise in the general price level. We assess inflation:

Inflation in Australia, 1970-2004

Two types of inflation

We can distinguish two different resources of inflation in an economy:

Demand-Pull Inflation

Occurs when a rise in Advertising pulls up the purchase price level.

Cost-Push Inflation

Occurs when an increase in the price of production at each price level shifts the AS curve leftward leading to increased prices.

Demand-pull inflation

Short-run: There is an increase in demand, such as a rise in consumer spending, so AD shifts rightward. AS will not change in the brief run, and we have a movement across the AS curve. Price level and GDP boosts. .

Long run: Workers will appreciate their real pay have fallen and will demand and receive increased nominal wages. As costs grow, supply decreases and the Concerning shift to the left. Price level increases, and GDP declines.

May be induced by expansionary fiscal and financial regulations - can be countered by contractionary insurance policies by the federal government.

Demand-pull inflation- SR and LR

Cost-push inflation

Short-run: Increased prices and lowered real result (and even more unemployment). Triggers can be:

Wage push : upsurge in wage rate - electricity of trade unions

Supply shocks - upsurge in prices of major recycleables - oil etc.

Profit thrust : upsurge in profit dependence on large monopoly businesses.

The AS curve shifts to the remaining/up as prices and costs rise, and firms cut back on output.

Cost-push inflation

Long-run: You will discover two scenarios.

Government intervention ( change in Advertising): If authorities intervenes to increase Advertisement, prices and end result will go up, moving us back again to the natural rate of outcome.

No Federal government intervention (no switch in AD): If federal does not intervene to increase Advertisement, a severe recession will end result. However nominal salary will eventually decline and will repair AS to its original position, moving us back again to the natural rate of result.

Cost-push inflation- SR and LR

Phillips curve

Suggests an inverse marriage (or a trade-off) between inflation and the unemployment rate

Named following a W Phillips who formerly discovered the partnership between unemployment and nominal income, using United kingdom data in 1950s.

In basic, inflation is associated with economic growth, and unemployment with economic recession.

During growth : the higher the pace of development of Advertising - inflation is high, and unemployment is low.

During recession : the slower the rate of expansion of Advertisement - inflation is low, and unemployment is high.

Phillips curve

Policy implications of Phillips curve

Trade-off suggests : a rise in inflation should lead to a decline in unemployment, and vice versa.

In basic, both can't be brought right down to the minimal level.

The society must make a choice between low inflation and low unemployment.

Phillips curve in Australia


Simultaneous connection with high and increasing unemployment and inflation - cost-push inflation.

Caused by :

Aggregate supply shocks such as severe rises in fuel costs, and devaluations;

Productivity declines; or

Inflationary goals and salary - anticipations about the likely future journey and rate of increase of the overall price level.

Stagflation in Australia

1973-74 : Cost drive - induced by international oil price surge.

1979 : cost-push - triggered by international oil price rise.

1981-82 : cost press - induced by rapidly growing wages.

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