Explain how governments are restricted in the simultaneous achievement of economic objectives.
The government sets many economic objectives include internal balance, external stability, environmental sustainability and the redistribution of income. However, it is difficult to achieve success with all these objectives simultaneously, i.e. there are some conflicts between policy objectives. Over the last 10 years Australia has been able to achieve low inflationary economic growth despite the GFC. Nevertheless, the fundamental conflicts between objectives will always exist and hence policies must work together to achieve the best possible outcomes in all areas.
One of the government’s main aims is to achieve internal balance, which includes sustainable economic growth, low unemployment and low inflation.
The government’s main economic objective is to achieve the highest possible sustainable long-term economic growth rate. This includes reducing fluctuations in the business cycle and stabilising the level of aggregate demand. The government aims for between 3.5% and 4.5% annual growth in real GDP, believing that a growth rate near 4% represents Australia’s maximum non-inflationary long term sustainable growth rate. The current rate of growth of _____ represents a below-average rate of growth but this has been primarily caused by ____________________________________
The government also aims to achieve full employment in the economy to maximise usage of resources and hence production. Full employment, or NAIRU (Non-Accelerated Inflation Rate of Unemployment), is reached when all cyclical unemployment has been removed and only structural unemployment remains. The level of full employment is difficult to forecast, but the government believes it lies between ________. The current unemployment rate of _______ is approaching the NAIRU. The government would then aim to lower the natural rate of unemployment through microeconomic reforms such as retraining programs.
The final objective in internal balance is price stability. This means a low, stable rate of inflation. The Reserve Bank’s target is ____________ annual increase in the CPI, as a low level of inflation indicates growth in the economy. The government’s aim is to remove cost-push inflationary pressures within the economy, which has been achieved through _________________________________________________.
External stability refers to the current account deficit (CAD), exchange rate and foreign debt. With the CAD, the government’s objective is to restrict the size of the CAD, preferably within 5% of GDP. The government’s objective with the exchange rate is to achieve a stable exchange rate that does not exhibit wild appreciations or depreciations in the short term. A small upward or downward trend is generally considered to be acceptable. The government also wishes to keep foreign debt and liabilities at a sustainable level, around ________________ of GDP....