Activity 5n

Activity 5n: The good, the bad or the….?

Inflation was 5% over the past year and Harry’s wage remained at ………………..

This is likely to be a bad result because if his wage remains at $50,000 when inflation is above 0 it means that his real wage is declining


Ann Martinos has $100,000 invested in the bank at a fixed interest rate of 5% per annum for two years…………..  

This is likely to be a bad result. The real value of her investment declines for each year that the inflation rate is higher than the interest rate paid by the bank.  Effectively means that her $100,000 will buy fewer and fewer goods and services for each year that inflation > interest rates (i.e. the purchasing power of her $100,000 declines each year)


Australia’s inflation rate remains at 3% when …………………………

This is likely to be a good result.  This is because Australia’s international competitiveness will increase as our goods and services will be more attractive (in price terms) in international markets.  This should boost Australia’s net export demand, increasing AD and economic growth and all of the positives that stem from this (e.g. greater employment income and overall living standards).


A tile importer in Prahran sources all her tiles from India, where the rate of inflation has…………………

This is likely to be a bad result.  This is because Australia’s inflation rate is relatively high which is a contributing factor to the tile importer purchasing more tiles from a country experiencing lower rates of inflation.  [For example, the tile importer is likely to be responding to greater consumer demand for cheaper imported tiles given that Australian produced tiles are relatively more expensive.] This has negative implications for net exports, AD and economic growth. [However, it could also be a good result in terms of its impact on the efficiency within the tile manufacturing industry within Australia given that they are forced to reduce costs in order to remain competitive with imported tile manufacturers.]


Australian businesses get caught up in a……………… 

This is likely to be a bad result.  This is because wage/price spirals can be very difficult to break and result in higher and higher costs and prices which ultimately erodes Australia’s international competitiveness and has negative implications for economic growth and living standards. 


Bracket creep occurs…………………..

This is likely to be a bad result.  This is because it results in the purchasing power of household disposable incomes to fall given that more and more people move into higher tax brackets.  This can negatively affect consumption demand, AD and economic growth.  However, it can be a good result for the federal government because it effectively receives more income tax from households which he can then use to reduce the government’s budget deficit or to increase spending on government services which helps to improve living standards for some Australians.


Consumers gain confidence as inflation…………………..

This is likely to be a good result. This is because greater consumer confidence results in more consumer spending which increases access to/enjoyment of goods and services, boosts AD and economic growth, and leads to greater levels of employment and income, further boosting spending and increasing living standards.


Githika lends her friend Tony $30,000 ………………..

This is likely to be a bad result for Githika but a good result for Tony.  This is because the $30,000 that is repaid to her one year later will effectively buy 10% fewer goods and services than the year before (i.e. the purchasing power of her $30,000 has declined because of a 10% increase in the average prices of goods and services). However, Tony wins from this transaction because he has been able to borrow at 0% when, without her generosity, he would have been forced to borrowed at a rate in excess of 10% in financial markets.  He is therefore 10%+ better off.  Indeed, Tony had the opportunity to invest that $30,000 and earn more than 10% interest (i.e. more than $3000).  In simple terms, Githika has lost a minimum of $3000 and Tony has gained a minimum of $3000.


Zane is an exporter of sheep …………………

This is likely to be a bad result.  This is because they knew is likely to experience a fall in the demand for his sheep given that they will now be relatively more expensive compared to New Zealand sheep.  This will result in lower export income for Zane (and Australian more generally) and have negative implications for living standards.  [However, as was the case with the tile manufacturers, it is possible to argue that higher inflation rates force Zane to increase the efficiency of his farming operations in order to remain competitive.  Once inflation falls back over time, Zane’s higher efficiency levels will enable him to achieve greater success in penetrating global markets.]


Higher inflation causes…………………………

This is likely to be a bad result because higher interest rates negatively impact on AD, economic growth and living standards.  However, to the extent that this RBA intervention successfully reduces inflation, the action (i.e. tighter monetary policy) will be a good result.