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Define Inflation
the rate of change in prices over a given period of time, usually over one year.
What is the ideal range for inflation
2-3%
Why is inflation within 2-3% good?
considers fluctuations between peaks and troughs in the economic activity known as the economic cycle. Inflation within this range results in reasonable price stability, economic growth, and international competitiveness
Disadvantages of Inflation
reduction of purchasing power, power of saving, impacts people with fixed incomes, breaks business confidence, and creates instability.
If objectives are met
develops sustainability and living standards
Types of inflation
cost push, demand pull, imported
Define cost-push inflation
rising production costs e.g., wages
Define demand pull inflation
excessive demand e.g., house prices
define imported inflation
change in the cost of imported goods and fluctuations in the exchange rate e.g., fuel
What policy does the gov use?
fiscal
What policy does the RBA use?
monetary
What are the two criteria being used?
target inflation rate and appropriate policy stance
What is a measure of inflation
consumer price index
What stance should the gov take?
contractionary policy stance
Fiscal policy stance?
increase taxes decrease expenditure (surplus)
Objectives of the AUS gov
employment, economic and price stability
Monetary policy stance
encourage savings, increase cash rate
What happens when you increase the cash rate?
transmission mechanism causes the interest rates to increase
What is bracket creep?
greater percentage of income goes towards tax.
GDP
3-4%
Unemployment
3.5-5%
Keynesian Theory
It is one of the key roles of the government was to actively intervene and manage the macroeconomy which is the basis for the essay.
Higher interest rates
attract foreign investment
Lower interest rates
Decrease foreign investment
In relation to money supply and aggregate demand, increasing the cash rate
decrease money supply, increasing AD
Why is decreasing income tax bad for inflation?
Demand-pull inflation, people have more purchasing power meaning more demand for goods and services.
Covid resulted in
limited supply
Aggregate demand curve needs to move to the… in times of inflation
left
Increasing income tax
decreased money supply, disposable income, AD, inflation
Moving AD to the left
deflationary demand shock
Moving AS to the right
deflationary supply shock
Australia’s objectives
sustainability, internal and external stability, improved standard of living, social equity, and efficient resource allocation.
