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Explain how governments are restricted in the simultaneous achievement of economic
objectives.
The government sets many economic objectives include internal balance, external
stability, environmental sustainability and the redistribution of income. However, it is
difficult to achieve success with all these objectives simultaneously, i.e. there are some
conflicts between policy objectives. Over the last 10 years Australia has been able to
achieve low inflationary economic growth despite the GFC. Nevertheless, the
fundamental conflicts between objectives will always exist and hence policies must work
together to achieve the best possible outcomes in all areas.
One of the government’s main aims is to achieve internal balance, which includes
sustainable economic growth, low unemployment and low inflation.
The government’s main economic objective is to achieve the highest possible sustainable
long-term economic growth rate. This includes reducing fluctuations in the business
cycle and stabilising the level of aggregate demand. The government aims for between
3.5% and 4.5% annual growth in real GDP, believing that a growth rate near 4%
represents Australia’s maximum non-inflationary long term sustainable growth rate. The
current rate of growth of _____ represents a below-average rate of growth but this has
been primarily caused by ____________________________________
The government also aims to achieve full employment in the economy to maximise usage
of resources and hence production. Full employment, or NAIRU (Non-Accelerated
Inflation Rate of Unemployment), is reached when all cyclical unemployment has been
removed and only structural unemployment remains. The level of full employment is
difficult to forecast, but the government believes it lies between ________. The current
unemployment rate of _______ is approaching the NAIRU. The government would then
aim to lower the natural rate of unemployment through microeconomic reforms such as
retraining programs.
The final objective in internal balance is price stability. This means a low, stable rate of
inflation. The Reserve Bank’s target is ____________ annual increase in the CPI, as a
low level of inflation indicates growth in the economy. The government’s aim is to
remove cost-push inflationary pressures within the economy, which has been achieved
through _________________________________________________.
External stability refers to the current account deficit (CAD), exchange rate and foreign
debt. With the CAD, the government’s objective is to restrict the size of the CAD,
preferably within 5% of GDP. The government’s objective with the exchange rate is to
achieve a stable exchange rate that does not exhibit wild appreciations or depreciations in
the short term. A small upward or downward trend is generally considered to be
acceptable. The government also wishes to keep foreign debt and liabilities at a
sustainable level, around ________________ of GDP.
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Australia’s main economic problem has been external stability. The CAD is
____________ or ________ of GDP. The exchange rate is stable and strong, which is
bad for non-mining exporters and foreign tourists visiting Australia. Also, net foreign
liabilities are a record _____________of GDP.
Another government objective is in relation to the environment. The government would
like to achieve ecologically sustainable development and __________________ equity,
whereby the rate of growth and economic development is compatible with the long-term
preservation of the environment. Resources should also be available to future
generations so that economic growth can be sustained over time.
The other main economic objective of the government is the distribution of income and
wealth. It would be favourable to achieve reductions in the level of income inequality,
and this has been achieved to some extent through a progressive tax system and welfare
payments. However, microreform policies have resulted in _____________________
_____________________________________________________________________
Even though the government is focused on achieving internal balance and external
stability, their focus on environmental issues and the distribution of income has
______________________________________________________________________
The economic objectives do, however, conflict with one another. Economic growth and
lower unemployment come in unison as increases in income and demand generate
increases in the production. To increase production, firms will call upon more labour
resources, hence decreasing unemployment and moving towards full employment. This
helps to increase incomes and improves the standard of living in the economy.
However, the increase in aggregate demand required to achieve increases in economic
growth also had negative impacts. Firstly, demand-pull ____________ rises when
maximum production and full employment are in place, and demand for goods keeps
rising. If supply doesn’t increase, firms increase their prices and sell goods to the highest
paying bidder.
This trade-off between inflation and economic growth may also be considered as a tradeoff between inflation and unemployment. To achieve low unemployment, high growth is
required. This means that it is very difficult to simultaneously achieve low inflation with
high growth and low unemployment. This trade-off is represented diagrammatically in
the Philips Curve. The curve clearly indicates the inverse relationship between inflation
and unemployment. However, the government’s objective of low unemployment and
low inflation can __________________________. In recent years Australia has
experienced ____________________________________________
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Inflation
Philips Curve
Unemployment
High growth also has effects on the external stability of the economy. Higher domestic
economic growth results in increased incomes and aggregate demand. This not only
increases the demand for domestically made goods, but it also increases the demand for
foreign goods, i.e. ____________. As the demand for imports increases, the current
account deficit worsens due to this negative contribution. This will increase the growth
of foreign debt and net foreign liabilities due to the increase in inflow of foreign savings
through the capital and financial account to balance the increase in the CAD. Hence, it is
difficult to simultaneously achieve high domestic economic growth and external stability.
In _______Australia experienced a trade _________ of _______________ because
_______________________________________________________________________
Another trade-off in government objectives is higher economic growth and
environmental quality. Economic growth results in increased levels of production, which
is only possible if more natural resources are used. This reduces environmental quality.
Nevertheless, it is expected that when economic growth and incomes increase, firms will
start to implement more _______________ friendly production methods and people will
take steps to reduce pollution and other activities that cause environmental damage.
Whether this is true or not remains to be seen.
Finally, it is difficult to simultaneously achieve high economic growth and an equitable
distribution of income. High economic growth tends to favour those on high incomes
and enterprise bargaining agreements due to the productivity improvements that may take
place. Also, as the labour market tightens, those with most skills and those in the better
bargaining position benefit more because they can bring more factors of production (i.e.
through their wider skills base) to the firm. The unskilled __________________ workers
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generally do not benefit as much as the high income earners, and hence inequality of
income in the economy increases.
Economic growth also increases the prices of assets, such as houses and business capital.
This also increases wealth in the economy disproportionately as those who have more
wealth will benefit more. Hence, inequality in wealth distribution also increases.
Because of the conflict between economic objectives, the government must compromise
on its primary objective of economic growth. By achieving sustainable economic growth
in the 3.5% - 4.5% range, the government aims to reduce ______________slowly,
constrain demand inflation and control the demand for imports. On the other hand, the
government can directly intervene by introducing legislation to preserve the environment
and control resource use or tax ________________. It can reduce inequality by
progressive income tax and ____________________ payments.
The government has many policies to achieve these objectives. On the macroeconomic
side, counter-cyclical policies are used as demand management tools, i.e. to reduce the
fluctuations of the ___________________. Macroeconomic policies include Fiscal
Policy and the implementation of the ______________. This includes the progressive tax
and transfer payments which help to reduce income inequality. In recent years, the
government has used fiscal policy as a demand management tool, however, it is likely
that fiscal policy will play a more neutral role as the global economy recovers – balanced
budgets over the course of the business cycle. This year’s planned budget _________ is
mildly ______________because _________________________________________.
The other macroeconomic policy, monetary policy, will once again become the swing
arm of the government’s policy mix. Over the last 10 years ________________ has been
the main macro tool used by the government to regulate the business cycle, through
changes in the level of interest rates. Monetary policy has been very successful in
achieving strong, sustainable growth and low inflation. Economic growth has averaged
3.9% in the last decade, which has led to low unemployment, now at ___________.
Also, inflation has been maintained within in the RBA’s target band of 2%-3%. The cash
rate is currently ____%
This success in achieving the conflicting objectives of inflation and economic growth
signals very successful economic management on behalf of the government. It could be
said that the Australia has overcome the Philips curve relationship to some extent.
Successful microeconomic policies have been the key to the success of the Australian
economy throughout the last decade. Microeconomic policies focus on reforming
individual sectors of the economy to improve the allocation of resources, i.e. to improve
efficiency. Micro policies are supply side policies and aim to increase aggregate supply
in the economy. Decreasing protection, labour market reform, competition policy,
deregulation and public sector reform have all played a major role in increasing the
efficiency of the economy through structural change, i.e. changing what and how we
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produce to suit our particular strengths. This has been the key factor in achieving and
increasing the long term sustainable growth rate to between _________________
Microeconomic reform has also reduced cost-push inflation throughout the economy
through successful labour market reform and introduction of enterprise bargaining.
Decreased protection and increased competition have also helped in reducing inflationary
pressures. With cost-push problems out of the way, monetary policy has become more
effective at achieving its aim of low inflation and sustainable economic growth.
Hence, the government’s policy mix has been successful in compromising and even
overcoming some of the conflicts between policy objectives.
The main problem with the Australian economy is the external sector, but the CAD can
be attributed to ______________________. Net foreign liabilities have also risen to a
record _____________ of GDP, which could remain a problem as income repayments
will also increase.
The exchange rate had been appreciating compared to the US dollar and the TWI over the
last few years and this was another indicator of good economic performance and
management.
Hence, there are main conflicts between objectives and governments are restricted in
simultaneously achieving all their objectives. However, very successful economic
management, especially microeconomic reform, have seen Australia achieve many of its
objectives to the desired level. As world growth ___________________, the Australian
economy could