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

The Australian government and the RBA pursue three macroeconomic goals:

Economic growth: real GDP year-on-year, from ABS National Accounts (cat. no. 5206.0). Real GDP per capita is a better measure of living standards.

The 2022-24 period saw a textbook trade-off: tight labour market and strong growth produced an inflation spike; the policy response (tighter monetary policy, fiscal consolidation) brought inflation down at the cost of slower growth and rising unemployment.

Short-run Phillips curve trade-off. Empirically, lower unemployment tends to coincide with higher inflation in the short run.

When real GDP growth exceeds the trend rate (potential growth), the economy moves above its non-inflationary capacity:

Okun's Law (Australian estimates): a 1 percentage point rise in real GDP growth above trend tends to lower unemployment by around 0.5 percentage points.

The three goals are sometimes supplemented by:

The 2022-24 disinflation effort combined:

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.

The 2022-24 episode showed inflation control required modest job losses.