Question

Table 2.1: Australia's Hypothetical Forecasts 2011 Estimate 3.1 4.7 2012 Forecast 3.8 5.0 2013 Forecast 4.2 5.5 3.0 3.5 3.75 Household consumption Exports of Goods and Services by Volume Imports of Goods and Services by Volume Real Gross Domestic Product External accounts Value of $A relative to $US (average value) Current account balance % of GDP) Labour market Employment (millions) Unemployment Rate Prices and Wages Consumer Price Index 1.07 -2.3 1.12 -2.1 1.30 -1.9 11.12 4.9 11.65 4.6 11.65 4.6 2.9 3.5 3.7 a) What do you see as the main emerging problem for the Australian economy over this period? (2 Marks) b) Which three variables is the appreciation of the Australian dollar most likely to affect? (3 Marks) c) How is employment and the unemployment rate related to real GDP growth? (5 Marks) d) Given these projection, what would be the appropriate policy for the Australian government and the RBA? (10 Marks)

Answer 1

1. The biggest emerging problem here is that the CPi inflation is risisng as unemployment reduces which can be problematic if it goes beyond target band.
2. Inflation, higher exports, and value of Australian dollars vis-a-vis US dollar have weightage on appreciation of currency.
3. Higher employment creates higher disposable incomes on aggregate basis which drives consumption and hence overall national demand rises which boosts real GDP growth and similar higher unemployment gives exactly opposite results.
4. RBa must adopt contractionary monetary policy as the inflation rises and hence interest rates must go up which will also appreciate Australian dollar. Similarly government must be looking at contractionary fiscal policy through tad raises and lower spending to drive down consumption and inflation simultaneously.