ECO AOS 2 | save me 😭😭

Definition: Goal of Strong & Sustainable Economic Growth (SSEG)

The highest growth rate possible (approx. 3-3.5% Real GDP p.a.), consistent with full employment, without causing unacceptable inflationary, external, or environmental pressures.

Definition: Goal of Full Employment & The NAIRU Consequence

The lowest rate of unemployment that doesn't accelerate inflation (zero cyclical unemployment). If unemployment falls below the NAIRU -> labour shortages -> upward pressure on wages -> cost-push inflation.

Definition: Goal of Price Stability (Low Inflation)

A sustained increase in the general level of prices, where the RBA aims to keep the CPI at a rate of 2-3% on average over time.

Distinguish: Demand-pull vs. Cost-push inflation

Demand-pull is caused by excessive AD (AD > AS), leading to widespread shortages. Cost-push is caused by rising costs of production (e.g., wages/oil) which firms pass onto consumers to protect profit margins.

Distinguish: Headline vs. Underlying Inflation

Headline CPI measures price changes of all goods in the regimen. Underlying (Trimmed Mean) removes the top 15% and bottom 15% of volatile/one-off price changes (e.g., fruit/fuel) to show the core inflation trend.

Distinguish: Cyclical vs. Structural Unemployment

Cyclical is caused by a lack of Aggregate Demand (recession/slowdown). Structural is caused by a mismatch of skills or technology (AS side) and can exist even when AD is strong.

Distinguish: Disinflation vs. Deflation

Disinflation is a decrease in the rate of inflation (prices still rising, just slower, e.g., 7% to 4%). Deflation is a decrease in the general level of prices (negative inflation rate).

Living Standards: Material vs Non-Material & How Inflation hurts Material LS

Material = access to goods/services. Non-material = quality of life (stress, environment). High inflation hurts material LS because prices rise faster than wages -> eroding purchasing power -> households can afford fewer goods.

Transmission: How Interest Rates affect SSEG (Discretionary vs Disposable)

Higher rates DO NOT change Disposable Income (income after tax). They lower Discretionary Income (money left after mandatory loan repayments) -> Lower C & I -> Lower AD -> Slower Real GDP growth (SSEG).

Transmission: Derived Demand for Labour (e.g., if Consumer Confidence falls)

Less C -> Lower AD -> Firms reduce production -> Firms need fewer workers (less derived demand for labour) -> Higher cyclical unemployment.

Formula: Participation Rate

(Labour Force / Working Age Population 15+) x 100. (Note: If discouraged workers give up looking, the participation rate falls).

Concept: Underemployment & The Under-utilisation Rate

Underemployment: Workers want more hours but can't get them (economy operating inside PPC). Under-utilisation rate: Unemployment Rate + Underemployment Rate. (It shows total unused labour capacity).

AS Factors: Exchange Rate & Supply Chain Disruptions

Depreciation: Imports (fuel/machinery) become dearer -> higher production costs -> cost inflation. Supply Chain Disruptions: Limits access to inputs -> reduces economy's productive capacity (AS).

Circular Flow: What are the Injections and Leakages?

Injections = Investment (I), Govt Spending (G), Exports (X). Leakages = Savings (S), Taxes (T), Imports (M). (If Leakages > Injections = AD falls).

Concept: Consequence of High Inflation on International Competitiveness

Local goods become more expensive compared to foreign goods -> Exports fall (less attractive) and Imports rise (cheaper alternatives) -> Net Exports fall -> AD falls.