Policies to sustain low inflation

• The Aus gov uses macroeconomic (monetary, fiscal) and microeconomic policies to achieve sustainable eco growth
  • which allows real incomes to be increased whilst inflation is minimised

Monetary policy

• Monetary policy attempts to sustain economic growth at a level that does not create inflationary pressures

  • trying to hold inflation between the RBA’s target of 2-3%

• If inflation starts increasing

  • → RBA increases interest rates (w/ contractionary Monetary policy)
    • → dampens consumer and investment spending (decreasing AD)
      • → lowers economic activity → lowers inflation

• Limitations:

  • often has a time lag (takes a while to see results)
  • works best in the aim of lowering inflation, a lot less effective the other way around (if trying to decrease deflation)

• RBA often uses a pre-emptive monetary policy, to tackle inflation before it emerges as a problem

  • in 2022 the RBA delayed increasing interest rates despite inflationary pressures
  • because it was uncertain whether it was temporary due to COVID’s affect on global supply chains
    • they were wrong, inflation was sustained, the RBA responded with aggressive tightening
      • → the fastest rise in interest rates since the 2-3% target was adopted

Fiscal policy

• in periods of rising inflationary pressures
  • → gov may increase taxation (+AS)
    • and/or decrease gov expenditure (-AD)
  • → contains the growth in AD → dampens Cost-push inflation.

Microeconomic policies

• Microeconomic policies have contributed to Australia’s long-term record of low inflation.

• Reduced protection has

  • lowered the prices of imports,
  • increased the competition faced by domestic producers
    • (from overseas competitors, and new entrants to domestic markets)
    • → This makes it more difficult for domestic producers to raise their prices.

• Labour market policies are
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• microeconomic policies that are aimed at influencing the operation and outcomes in the labour market,

  • including industrial relations policies that regulate the process of wage determination
    • reforms to the labour market attempt to ensure that wage increases are linked to productivity improvements
    • If productivity rises, the economy will be able to afford real wage increases without inflationary pressures.
  • as well as training, education and job-placement programs to assist the unemployed.

• During the mining boom (in the 2000s & 2010s), Australia’s deregulated labour market allowed for wage increases for workers whose skills were in high demand, without leading to large wage rises in other sectors of the economy.