SCSA Economics Economic skills

expansionary/expansion phase/upswing/recovery

＄90bn

Answers could include:

• increased net exports
• lower unemployment leading to higher household income and higher consumer spending
• increased AD: government, consumer, investment spending, increased exports.
• expansionary monetary and fiscal policies.

Answers could include:

• RBA would use expansionary monetary policy and lower the cash stance to stimulate economic activity
• The lower cash rate will stimulate economic activity via the transmission mechanism.
• This will increase GDP, lower unemployment, increase consumption and investment spending and lower AUD, causing increase in exports
• There is consideration of the multiplier and a clear reference to the model.

Answer(s) could include:

AD/AS Model:

• price on Y axis, real GDP on X axis
• intersection of SRAS and AD at a point beyond LRAS (vertical line) level (identification of expansionary gap)
• aggregate demand curve located in the classical range of AD/AS models.

Characteristics of boom phase:

• economy operating beyond sustainable GDP growth rate
• low levels of cyclical unemployment
• higher participation rate
• higher inflation and wages
• increase in businesses profits and confidence
• increase in consumer confidence and purchasing of durables
• rising share prices
• less government welfare spending
• higher interest rates due to demand for credit and monetary policy
• greater spending on imports.

Answer(s) could include:

Sustainable economic growth:

• sustainable economic growth will allow a long term increase in living standards
• above trend economic growth rate will occur in an economic boom
• economy will reach maximum capacity and bottlenecks will begin to occur
• product and resource market prices will rise causing inflation
• high interest rates from the demand for credit and contractionary MP will discourage borrowing
• consumer and business confidence will fall and the economic growth will decline (often very quickly).

Low unemployment:

• strong economic growth in a boom will increase demand for labour
• cyclical unemployment will fall
• structural unemployment will rise as the boom shifts resources such as labour to the most profitable sectors
• high cost of labour in a boom may lead to capital for labour substitution
• frictional unemployment will rise as workers will be more willing to shift jobs in the search for wage/income increases.

More equitable distribution of income:

• a more equitable distribution of income will occur in a boom as labour is in greater demand
• booms however can benefit some sectors more and upskilling workers to transition in a changing economy takes time
• equity will depend on the effectiveness of the Government's tax and transfer system
• in general economic booms improve equity as 'a rising tide floats all boats' or as Prime Minister Howard once said: 'The best form of welfare is a job'.

The CPI data shows there are no inflation pressures from consumer prices or wages, indicating the economy has not experienced demand pressures for three years.
The export data demonstrates that Australia has some external stability pressures, because the export value of coal has fallen by ＄70 billion.
These two datasets, in the absence of further information, indicate that economic activity is weakening. They also provide evidence of negative forces acting within Australia’s economy that require stimulatory policies.
Proposals to achieve a federal budget surplus as expected cannot be justified at this time, because it would mean contracting the economy, which could result in inflation and wages falling further. The fall in wages would be expected to cause households to defer spending and save, causing a flow-on effect on business investment. This would result in several negative forces acting on aggregate demand and reducing economic growth. Consequently, the productive capacity of the economy should be increased.