Effects Of Economic Growth On Unemployment And Inflation

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Discuss the effects of economic growth on unemployment and inflation in Australia

Economic growth is an increase in the volume of goods and services that an economy produces over a period of time and is measured by the annual rate of change in real Gross Domestic Product (GDP). Economic growth is classified as one of the most important indicators of an economy’s performance. Australia has maintained an average of 3.3% real GDP growth since 1992. The pursuit of a stable economic growth is a major objective of government policy, however, the optimal rate of economic growth varies due to its impacts on unemployment and inflation.

In a market economy, prices are determined by the interaction of demand and supply in the marketplace. Economic
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This increases aggregate demand and real GDP through increased government spending (E0->E1). For example, during the GFC the RBA cut the cash rate drastically from 7.25% to 4.25% driving up consumption and investment in the economy. However, this resulted in the inflation rising to 5.2%. The fiscal stimulus package improved economic growth rate by 0.6% as consumer confidence increased. By expanding aggregate demand, in 2009, the fiscal stimulus supported 210,000 jobs and the peak unemployment rate was 1.5% lower than if there was no fiscal stimulus. By the multiplier effect, further investment by the government into building projects supported unemployed workers thus raising consumer spending. This increased the total level of national income in the economy from Y0->Y1 thus raising GDP and lowering unemployment but inflation increased as a result of increased consumer spending.

Inevitably, when aggregate demand is increasing, the inflationary expectations result in employees bargaining for increases in their nominal wages to adjust with inflation. This is known as cost-push inflation whereby the costs of production for a businesses increases. Subsequently, employers lay off workers in an attempt to reduce their costs of production while also upholding productivity and consumer demand. This increases the unemployment rate whilst the inflation rate is lowered in the short term as seen from the short-run Phillips curve
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