INFLATION:

Evaluate the effectiveness of Australias government policies (macro and micro)

designed to control inflation
What is a healthy inflation?
For Example: Japan aim to increase its inflation by raising the consumption tax (cost
push inflation). Moreover, Aus had an one off increase in inflation in the early 2000s.
Typically, any tax hype would be a head win of the economy. i.e. it will slow
economic growth. For instance, when Japan raise consumption tax it caused
inflation driven by a rise in the price level associated with consumer tax.
Hence, it could be seen as counterproductive because it diminishes real
purchasing power for consumers. Therefore, a good inflation is one that
maintain real purchasing power.
Inflation targeted by RBA must focus on the underlying inflation that is apart
from the typical cost push and demand pull it must also focus on inflation
expectation.
In order for inflation to be effective policies must be in tandem. i.e. both
monetary and fiscal must take the same stance. E.g. At present RBA is seen
to be taking a loosening stance and maintain cash rate of 2.5% whereas the
fiscal budget on 14-15 has taken a tightening stance.
SIGN OF INFLATION AND ECONOMI GROWTH:
Tighten Labour Market
ANSWER TO QUESTION
Price stability is the main economic objective of the Australian government in
maintaining real income and international competitiveness. Together with full
employment it is the goal of internal balance. The governments macro policy used
to control inflation include:
Monetary Policy which operates with the inflation targets of 2-3% over the economic
cycle. Fiscal Policy which aims to achieve fiscal balance over the economic cycle to
minimize the incident of a budget deficit which may add inflationary pressures.
Price and income have been used in the past to contain wage and price pressures in
the economy.
Microeconomic reforms such as competition policy, labour market returns and
reduction in protection aimed at strengthening competition and raising productivity
in the economy.
INTRODUCTION
Government policies have been effective in controlling both inflationary outcomes
and inflationary expectations in the past via the introduction of GST as a one off
increase in inflation. However, there has always been a conflict between
government objectives in securing full employment and achieving price stability.
BODY
Inflation is the rate of increase in price level and is undesirable as it reduces
purchasing power, resource allocation and deterioration in international
competitiveness. The major cause of inflation include demand pull, cost push,
import and expectation which put a lot of pressure in the economy. Through
monetary authority RBA attempts to control monetary and inflationary expectation;

RBA uses an inflationary target of 2-3% CPI over the economic cycle via the
changing cash rates which can the used to alter the stance of monetary policy. This
will affect the cost and availability of credit in the economy.

Problems associated with Monetary Policy to control Inflation:

a. It conflicts with other economic objectives such as full employment (insert
phillip curve and discuss)
b. There is a need for supply side policy to target cost inflation such as labour
market reform.
c. long and variable lag associated with the use of monetary policy