Quick questions on Australia's three domestic macroeconomic goals (VCE Economics Unit 3)

The Australian government and the RBA pursue three macroeconomic goals:

The three goals are sometimes supplemented by:

Real GDP growth at or near the trend rate (Treasury estimates 2.0 to 2.25 percent in 2025), consistent with low inflation and sustainable resource use. "Strong" means growth that lifts material living standards; "sustainable" means growth that does not generate inflation, current account problems, or environmental degradation.

Unemployment at or near the Non-Accelerating Inflation Rate of Unemployment (NAIRU), estimated at 4.0 to 4.5 percent in 2025 by the RBA. Below the NAIRU, wage and price pressures accelerate. Above, there is spare capacity in the labour market.

The RBA targets headline CPI of 2 to 3 percent on average over the cycle. Low and stable inflation supports planning, preserves real incomes, and underpins international competitiveness.

Empirically, lower unemployment tends to coincide with higher inflation in the short run.

Draw the short-run Phillips curve with inflation on the y-axis and unemployment on the x-axis, sloping downward. The long-run Phillips curve is vertical at the NAIRU. A short-run rightward shift up the curve takes unemployment below NAIRU at the cost of higher inflation.

Over the long run, there is no trade-off. Sustained attempts to push unemployment below the NAIRU just raise inflation and inflation expectations, leaving unemployment back at NAIRU but with higher inflation. The 1970s "stagflation" episode is the textbook example.