“c02DomesticMacroeconomicGoals_PrintPDF” — 2022/7/23 — 6:51 — page 139 — #39
2.7.3 Reviewing how changes in aggregate supply factors can affect the economy
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In the short-term where there is unused capacity available in the economy and higher unemployment, a nation’s level of economic activity (and therefore its material living standards) largely reflects the level of aggregate demand. In other words, aggregate demand decides the extent to which the economy’s available capacity is actually used. However, in the longer term, it is impossible to keep on expanding the level of economic activity and production simply by spending more and boosting AD. The economy soon hits its capacity limits with very low unemployment. When this point is reached, further increases in national production depend on new, more favourable aggregate supply conditions that grow productive capacity.
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Figures 2.16 and 2.17 summarise the effects on the potential level of economic activity and domestic economic conditions, of generally more favourable or less favourable aggregate supply conditions. FIGURE 2.16 How more favourable aggregate supply factors can increase economic activity. Generally more favourable aggregate supply conditions More favourable aggregate supply conditions:
Generally more favourable aggregate supply conditions for Australian businesses — including greater access to resources and better profitability (e.g. due to lower wage costs, fewer government restrictions on business, lower rates of company tax, higher labour productivity, new mineral discoveries, increased immigration, lower oil prices, cheaper electricity, access to improved technology) — help to make firms more willing and able to produce goods and services and expand their operations.
Impact on inflation:
More favourable aggregate supply conditions that involve lower production costs mean that firms can profitably sell their goods and services at lower prices. This slows cost inflation and strengthens our competitiveness in international trade.
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The impact on production:
More favourable aggregate supply conditions that involve lower production costs, mean that firms can make better profits leading to expansion rather than business closures. Other things remaining equal, this causes a faster rise in the nation’s productive capacity, the PPF, and the potential, sustainable, or non-inflationary rate of growth in national production or GDP.
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The impact on unemployment:
More favourable aggregate supply conditions that involve lower production costs, mean that other things remaining equal, firms can make better profits leading to expansion rather than business closures. Over time, this helps to reduce structural unemployment.
The impact on incomes and living standards:
More favourable aggregate supply conditions that lead to slower cost inflation, better international competitiveness, business expansion and lower structural unemployment, all help to increase the purchasing power of incomes and improve material living standards. In addition, some aspects of non-material living standards can benefit from lower unemployment, including improved happiness, health outcomes and relationships.
TOPIC 2 Domestic macroeconomic goals
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