2.4 The business cycle and its cases

UNCORRECTED PAGE PROOFS

2Domestic macroeconomic goals

UNIT 3 AREA OF STUDY 2 Domestic macroeconomic goals OUTCOME 2 On completion of this unit the student should be able to analyse key contemporary factors that may have affected domestic macroeconomic goals over the past two years, evaluate the extent to which the goals have been achieved and discuss the effects on living standards. LEARNING SEQUENCE 2.1 Overview ...............................................................................................................................................................102 2.2 The difference between material and non-material living standards and factors that may affect each ...........................................................................................................................................................105 2.3 BACKGROUND KNOWLEDGE Nature, effects and measurement of economic activity ...110 2.4 The business cycle and its causes .............................................................................................................113 2.5 The five-sector circular flow model to understand the macro influences on domestic economic activity ..............................................................................................................................................119 2.6 Meaning and importance of aggregate demand, and the factors that may affect aggregate demand and domestic economic conditions .........................................................................................125 2.7 Meaning and importance of aggregate supply, and the factors that may affect aggregate supply and domestic economic conditions ............................................................................................133 2.8 Using a diagram to show how changes in aggregate demand and supply factors can affect domestic macroeconomic conditions .......................................................................................................143 2.9 The goal of low and stable inflation (price stability) .............................................................................154 2.10 The goal of strong and sustainable economic growth ....................................................................... 167 2.11 The goal of full employment ......................................................................................................................... 181 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 .......................195 2.13 Review ...................................................................................................................................................................211UNCORRECTED PAGE PROOFS

Hey students! Bring these pages to life online

Watch videos Engage with interactivities Answer questions and check results

Find all this and MORE in jacPLUS

2.1.1 Introduction Pick up almost any newspaper or go online, and you will find it littered with headlines about the prevailing economic conditions in Australia and abroad, and the multitude of drivers affecting our circumstances. Topic 2 focuses our attention on the three key domestic macroeconomic goals that are pursued by the Australian government and the Reserve Bank of Australia (RBA) — the goals of strong and sustainable rates of economic growth, low inflation and full employment. Indeed, achieving these goals helps to create economic conditions optimal for people to enjoy better material and non-material wellbeing. Apart from understanding the nature of these important goals and how they are measured, we will also investigate the main aggregate demand and supply factors affecting the achievement of these goals over the last two years and see the connections with changes in the level of economic activity. FIGURE 2.1 What comes into your mind when you think of the term ‘living standards’? For some, having a good living standard might mean residing on a tropical island such as this one. For others, it might mean travelling the world. And for some, it might just involve having a roof over your head and not going hungry. UNCORRECTED PAGE PROOFS

Key knowledge

Use each of the points from the VCE Economics Study Design below as a heading in your summary notes.

Key Knowledge Subtopic

The purpose of economic activity The difference between material and non-material living standards and factors that may affect living standards, including access to goods and services, environmental quality, physical and mental health, crime rates and literacy rates

2.2

The five-sector circular flow model of income, including the role of households, businesses, government, financial institutions and the external sector in an open contemporary macroeconomy

2.5

The business cycle and its causes 2.4 The meaning and importance of aggregate demand and the factors that may affect the level of aggregate demand in the economy, including disposable income, interest rates, consumer confidence, business confidence, the exchange rate and rates of economic growth overseas

2.6, 2.8

The meaning and importance of aggregate supply and the factors that may affect the level of aggregate supply in the economy, including quantity and quality of the factors of production, costs of production, technological change, productivity growth, exchange rates and climatic conditions, and other events including government regulations and disruptions to international supply chains

2.7, 2.8

The domestic macroeconomic goals The meaning of the goal of strong and sustainable economic growth 2.10 Measurement of the rate of economic growth using growth in real Gross Domestic Product (GDP)

2.10

Consequences of not achieving the goal of strong and sustainable economic growth and its effect on living standards, including environmental degradation, external pressures, high inflation if growth is too high, and high unemployment if growth is too low

2.10

The meaning of the goal of full employment, including the NAIRU (natural rate of unemployment)

2.11

Classifications within the labour force, including employed, unemployed, hidden unemployed, long-term unemployed, underemployed and frictional unemployment

2.11

Measurement of the labour force, including the participation rate, the unemployment rate and the labour force under-utilisation rate

2.11

The difference between cyclical and structural unemployment 2.11 The consequences of not achieving the goal of full employment and its effect on living standards, including the impact on GDP and tax revenue if unemployment is too high and the effects on inflation if unemployment is too low

2.11

The meaning of the goal of low and stable inflation (price stability) 2.9 The distinction between inflation, disinflation and deflation 2.9 Measurement of the inflation rate using the Consumer Price Index (CPI), including the difference between the headline and underlying (core) rate of inflation

2.9UNCORRECTED PAGE PROOFS

Causes of inflation, including demand inflation and cost inflation

2.9

Consequences of not achieving the goal of low and stable inflation (price stability) and its effect on living standards, including erosion of purchasing power, development of a wage-price spiral, distortion of spending and investment decisions, lower returns on investment, loss of international competitiveness if it is too high, and delayed consumption and unemployment if it is too low Aggregate demand and aggregate supply factors that have affected the level of achievement or non-achievement of the goals of strong and sustainable economic growth, full employment and low and stable inflation over the past two years

2.8

Key skills Key Skills These are the skills you need to demonstrate. Define key economic concepts and terms and use them appropriately Calculate relevant economic indicators using real or hypothetical data Construct, interpret and apply economic models including the five-sector circular flow model of income and the business cycle Explain and interpret trends and patterns in economic data and other information Gather, synthesise and use economic data and information from a wide range of sources to analyse economics issues Apply economic concepts to analyse economic relationships and make predictions Evaluate the extent to which the economy has achieved the domestic macroeconomic goals over the past two years, and discuss the effect of this on living standards Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. Resourceseses Resources Digital document Key terms glossary (doc-34512) UNCORRECTED PAGE PROOFS