economics sac 3

consequences of not achieving low and stable inflation

Decreasing PP

wage spiral

fall in international competitiveness

delayed consumption (low inflation)

distortion of spending and investment decisions

Important statistics

Cash rate - increasing 4.35%

Headline inflation 4.6% (march 2026)

Unemployment - increasing 4.3% (march 2026

Underlying inflation - lower than headline

GDP - increasing 1.8%

What has occured when headline is greater than underlying and vice versa

Headline greater = removing large price decreases

underlying greater = removing large price increases

Low and stable inflation

Refers to maintaining an increase in the general level of prices, as measured by the CPI, of 2-3% per annum over time, over the medium term

Inflation equation

Inflation Rate= CPIprevious​ - CPIcurrent

CPIprevious ​​×100

Full employment

Is achieved when cyclical unemployment is absent and there are no excessive inflationary pressures. This is estimated to be at around 4-4.5%

Hidden unemployment

People would like a job but aren’t confident enough to get one, so they’ve given up looking (not apart of labour force) (discouraged job seekers)

Long term unemployment

May have looked for a job for a long time, given up and stopped looking but still wish to work

Underemployed

Has a job but aren’t working as many hours as they would like (disguised unemployment)

Types of cyclical unemployment

Frictional (between jobs)

Structural (skills of unemployed aren’t suitable for vacant jobs)

Cyclical (effected by level of AD)

equations for unemployment PR + Unemployment rate

Participation rate = unemployed/ working age population x 100

Unemployment rate = unemployed / labour force x 100

structure of population

population = Working age population and Non working age population

WAP = Labour force and not in the labour force

LF = employed and unemployed

NILF = hidden unemployment

effects LFPR has on unemployment

Short term - increase LFPR = increase in unemployment rate (due to people entering labour force as job seekers

Long term - increase LFPR = increased supply of labour = drop in wages = lower unemployment

Unemployment rate in LFPR

increased unemployment = increased discouraged job seekers = decrease LFPR (increase NILF)

strong and sustainable economic growth

The fastest rate of real GDP growth consistent with employment growth that doesn’t cause excessive external, inflationary and environmental pressures. Is regarded to be at 3-3.5% per annum

EFCRO (AD)

Event

Factor

Component

Reaction (inventories, production) increased production = increased derived demand for labour

Outcome (economic growth)

EFCRO

Event

Factor

capacity

Reaction

Outcome

aggregate supply

Volume of goods and services produced domestically over a period of time

AS factors

• COP (land costs, labour (greatest), cost of capital) oil, fuel, electricity = increase COP for all firms

• productivity growth

• level of technology

• government regulations

• climactic conditions

• exchange rates (if increase =capital resources come cheaper = increase AS)

Unfavourable AS example

Event - Fuel prices increased due to the closing of the strait of hummus on Feb 28

Factor - increased COP

Capacity - Reduced capacity to produce goods n services

Reaction -

Outcome -

Favourable AS example

Event - appreciation of AUS dollar

Factor - exchange rates

Capacity

Reaction

Outcome

aggregate demand

refers to the total level of spending on domestically produced good and services in an economy over a period of time (C+I+G +(X-M))

Changes in variability + contribution

Investment = most variability (20% roughly)

Consumption = not as much (60% roughly)

Factors impacting AD

disposable income

interest rates

consumer confidence

business confidence

exchange rates

overseas economic growth

Hypothetical example for AD (unfavourable)

Event - increased cash rate to 4.35%

Factor - increased interest rates

Component - decrease consumption + investment due to increased cost of borrowing/increased benefit to save

Reaction

Outcome

Hypothetical example for AD (favourable example)

Event - increased GDP growth in South Korea and indonesia

Factor - increased overseas economic growth

Component - these countries will purchase more exports = increase in AUS exports

Reaction

Outcome

Material living standards

Ones access to goods n services

Non material living standards

subjective measures of wellbeing

GDP + inflation in relation to business cycle

Peak -high

Expansion - increasing

Trough - Low

contraction - decreasing

PROCYCLICAL

Unemployment in relation to business cycle

Peak -low

expansion - decreasing

trough - high

contraction - increasing

COUNTERCYCLICAL

Assumption about investment

assumption that all firms will borrow to pay for investment

transfer of payments

income paid to households (negative tax)

NOT GOV EXPENDITURE

4 types of payments

wages

interest

dividend

rent

GDP income, expenditure (consumption), production

GDP income - sum of income payment

GDP expenditure (consumption) - spending on final G+S

GDP Production - value of final G+S

What is profit paid out as?

Dividends