“c02DomesticMacroeconomicGoals_PrintPDF” — 2022/7/23 — 6:51 — page 195 — #95
2.12 Aggregate demand and aggregate supply factors that have affected the achievement or non-achievement of domestic macroeconomic goals over the past two years
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The domestic macroeconomic goals • Aggregate demand and aggregate supply factors that have affected the level of achievement or nonachievement of the Australian government’s goals of strong and sustainable economic growth, full employment and low and stable inflation over the past two years Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission.
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By now you should understand that aggregate demand factors, combined with aggregate supply factors, interact to determine Australia’s domestic macroeconomic economic conditions. They shape the extent to which our three main domestic macroeconomic goals are achieved, in turn influencing our living standards.
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Over the last few years to mid 2022, some quite volatile aggregate demand factors and often unpredictable aggregate supply shocks have dramatically changed Australia’s economic conditions. These factors help to explain why recently the Australian government has been unable to fully attain domestic economic stability, by simultaneously achieving the goals of low inflation, strong and sustainable economic growth and full employment.
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The overall impact of these events on the achievement of the Australian government’s goals is reflected in the three graphs making up figure 2.48. These graphs reveal the following trends: • The goal of low inflation: The RBA tries to keep the annual average inflation rate within the 2–3 per cent range. Figure 2.48 (graph 1) shows that over the last two years following deflation in 2019–20, the inflation rate accelerated first to 3.8 per cent and then to a peak of xxx per cent in 2021–22—the highest rate in 14 years. If sustained, this rate is clearly above the RBA target. Higher inflation recently can be traced to the impacts of aggregate demand and supply factors. Stronger aggregate demand factors have certainly played a role. However, inflation also reflects the impacts of lingering constraints to productive capacity and aggregate supply caused by supply chain issues, severe weather events and other cost factors. • The goal of strong and sustainable economic growth: The goal of strong and sustainable economic growth is the fastest annual rise in real GDP (perhaps averaging around 3 per cent) that does not accelerate inflation or undermine the achievement of other goals. Figure 2.48 (graph 2) shows that Australia’s recent level of economic activity has been highly unstable. After zero GDP growth in 2019–20, activity strengthened, first to 1.5 per cent in 2020–21 and then further to reach xxx per cent in 2021–22—a rate that would be unsustainable over the long-term. Overall, the goal of strong and sustainable economic growth has not been well achieved. There were good reasons for this. Initially, mostly weak aggregate demand factors played an important role in explaining the recession in the first part of 2020. These factors then strengthened over the last two years to help explain the strong recovery. However, some aggregate supply factors also played a role. For example, less favourable supply conditions involving lockdowns in the pandemic, disruptions to supply chains, low productivity and rising oil prices have at times limited the growth in productive capacity and the non-inflationary rate of GDP growth. • The goal of full employment: The goal of full employment is the lowest rate of unemployment (perhaps around 4.0 to 4.5 per cent) that does not accelerate inflation. Figure 2.48 (graph 3) shows that over the last two years to mid 2022, the unemployment rate continued to fall quickly to reach a 14-year low of 3.9 per cent in April 2022—just below the bottom end of the target range.
TOPIC 2 Domestic macroeconomic goals
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