Question

Australia's Sticky Unemployment Rate Underscores Reserve Bank of Australia (RBA)'s Monetary Policy
Challenge
Australia’s jobless rate held above 5% in May despite a surge in hiring, underscoring the Reserve Bank’s
challenge to drive down unemployment and stoke inflation.
RBA Governor Philip Lowe has made clear that easing monetary policy is not the ideal path to boosting hiring
and investment, and has urged the government to undertake structural reforms. The government is trying to
pass tax cuts that is estimated could stimulate the economy.
While the economy added 42,300 roles last month, new entrants were absorbed by a jobs market that
swelled to a record, the statistics bureau said in Sydney Thursday. That left the jobless rate at 5.2%, which is
well above the 4.5% level the RBA estimates is needed to revive price pressures.
The result was further diminished by most jobs being part-time and fewer hours worked, suggesting a less
robust labour market and likely explaining the currency rate decreasing. RBA Governor Philip Lowe resumed
cutting interest rates last week after a three-year hiatus as he bids to spur hiring and return inflation to
target.
Australia’s labour market has shown surprising resilience as hiring persisted despite weakness across much
of the economy. One explanation is that much of the hiring is coming from government-related programs
that are unrelated to prevailing economic conditions.
For much of the past year, Australia’s debt-laden households have cut spending as they grapple with
stagnant wages and watch falling house prices erode their wealth. Consumption accounts for almost 60% of
GDP and weaker spending has slowed economic growth.

Questions

1. Using a diagram, illustrate and describe Australia’s rate of inflation since 2000.

2. Using examples from the article, explain the following microeconomic concepts.

i. Diseconomies of scale

ii. Negative externalities

Answer 1

1. Figure-1 in the attached document below illustrates the impacts of the macroeconomic fluctuations of changes in the goods market in the Australian economy since 2000 as mentioned in the given article. AD1, SRAS1, and LRAS1 respectively represent the short-run aggregate demand curve, aggregate supply curve, and long-run aggregate supply curve prior to the concerned shocks or fluctuations in the domestic economy. The Y*1 denotes the full employment level of real output/income or GDP in the economy. Now, due to the lower private capital or business investment level by the domestic economy, the unemployment level increased in the economy, and the aggregate investment level or I decreased leading to a reduction in the AD. Furthermore, a decrease in the overall or aggregate consumption expenditure by the domestic households or C also contributes to the reduction in the AD and the compound impact of the decrease in both I and C has been indicated by a leftward or downward shift of the AD from AD1 to AD2. As a result, the real output or income drops from its full-employment level Y*1 signified by the intersection of AD1, SRAS1, and LRAS1 to Y2 accompanied by a decrease in the overall price level of goods and services in the economy from P*1 to P2 which implies a deflationary effect. Hence, a decline in the AD creates a deflationary impact and a recessionary gap in the Australian economy denoted by the difference between Y*1 to Y2.

2. i. In Macroeconomics and Production Economics, Diseconomies of Scale basically refers to an increase in the long-run average or per-unit cat of production as any commercial firm, company, or business organization expands its operational or production scale or volume. Hence, diseconomies of scale ideally represent a cost-ineffective approach of enhancing overall production level or capacity. In this instance, it can be reasonably assumed that due to relatively lower capital or business investment in the economy, the domestic firms or companies have been struggling to expand their production volume or level and reduce their overall production costs or expenses which has alarmingly engendered the consideration of a possible tax cut by the central government in Australia. This could expectedly ease off the rising production costs and expenses and induce higher capital or business investment for domestic businesses. Additionally, a reduction in the interest rate could also stimulate higher capital or business investment thereby stabilizing aggregate investment level in the economy. Hence, the unemployment level also rises as the firms or companies basically look to reduce the manpower or laborforce which would otherwise, add to the overall production cost or expense thereby further affecting the potential revenue generation and economic profitability of the firms or companies.

ii. In Economics, negative externality generally refers to any adverse or undesirable impact of economic or commercial activity or transaction. Negative externality of any economic activity or conduct can negatively or adversely impact the welfare or the well-being of any third-party entity/s that is/are not directly involved with the concerned activity or the conduct. Some of the common examples of negative externalities in Economics include industrial pollution, traffic congestion, environmental damages and detriments, and so forth. In this case, the new entrants or candidates in the job market are the unintended and indirect victims of the existing overall job market situation in Australia. The existing job market swelling has adversely impacted the likelihood of getting jobs or employment opportunities for the new job-seekers or entrants entering the job market, which can be evidently thought of as an extended or broader impact of the negative externality in the job market in Australia during the time period referred in the article.