The Australian Government’s Implementation of the Economic Stimulus Plan

746 WordsJun 25, 20183 Pages
Inflation can be described as the sustained increase in the general level of prices over a given period of time, usually one year. Inflation can have negative effects on many of the key economic outcomes such as economic growth, exports, international competitiveness and income inequality. Inflation is measured in Australia by the Consumer Price Index (CPI); the CPI outlines the movement in the prices of a basket of goods and services that are weighted according to their importance for the average Australian household. The annual rate of inflation is measured by the percentage change in the CPI over a period of a year, highlighted in Figure 3.1 . Recent Trends in Inflation Australia’s most significant macroeconomic achievement of…show more content…
Economic Justification of the Economic Stimulus Plan with regards to Inflation In order to reduce inflation the Australian government has traditionally implemented both contractionary fiscal and monetary policy. This would involve an increase in taxation or reduced government expenditure as well as increases in the official cash rate which would lead to a rise in interest rates in the economy to contain aggregate demand. However, during a period of global recession the Government’s implementation of expansionary fiscal and monetary policy saw taxation revenue fall and government spending increase, sending the budget into deficit by -$32.9 billion in 2008-09 . The 2009-2010 Budget continued expansionary policy to support economic growth and slow the rise in unemployment. The falling inflation rate of 1.5% in 2008-09 , meant it no longer played dominant role in policy making decisions. The tradeoff between inflation and unemployment can be observed in Figure 3.5 . Figure 3.5 illustrates the short run tradeoff between inflation and unemployment observed by New Zealand economist A. W. Phillips in Britain in the 1950s. A government attempting to decrease unemployment to a level below 4%, by an increase in government spending may tradeoff more inflation from 2% to 5% for less unemployment from 4% to 3%. Conversely, a government could cut government spending to tradeoff less inflation from 5%

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