But my point is different. Lowe is pursuing a conventional, business-as-usual approach to managing the economy because he assumes nothing fundamental has changed. His conventional thinking is that it’s weak wage growth that’s driving the economy’s relative stagnation. It hasn’t occurred to him it’s the other way round: the economy’s stagnation is the cause of weak wage growth. I think it’s clear the phenomenon of “secular (that is, long-lasting) stagnation” – exceptionally low inflation, low wage growth, low real interest rates, low business investment, low productivity improvement and low Economic Growth
– applies to our economy as well as to the United States and the other advanced economies.
This suggests that, … the true NAIRU is a lot lower: 4.5 per cent, maybe 4 per cent. And since, as Lowe reminds us, the RBA’s objectives include “delivering on full employment”, he should be trying harder to get unemployment down to the true NAIRU. How? By using the one instrument available to him: cutting interest rates to loosen amonetary policy that’s tighter than it needs to be. Until recently, Lowe’s best reason for not lowering rates was a desire to avoid adding fuel to the boom in house prices (“asset-price inflation”). But now that constraint has lifted, there’s no reason to hesitate. You could argue that, with households already so loaded with debt, a rate cut may not do much to boost consumer spending. But it probably would lower the dollar, which would improve our industries’ price competitiveness internationally, encouraging them to hire more workers. We’ve got little to lose.
Consider the statement that … it’s weak wage growth that’s driving the economy’s relative stagnation… Explain, the links between weak wage growth and weak short-term economic growth and depict this effect through the aggregate expenditure model. Hint: Be sure to consider each element in the aggregate expenditure model separately.
Consider The Statement
I think it’s clear the phenomenon of “secular (that is, long-lasting) stagnation” – exceptionally low inflation, low wage growth, low real interest rates, low business investment, low productivity improvement and low economic growth – applies to our economy… and how cutting interest rates will change this situation. Use the dynamic AD-AS model to analyse the outcome associated with cutting interest rates. In your answer, make sure to discuss the equilibrating process of moving to a new macroeconomic equilibrium output and the link between interest rates and each component of aggregate demand.
Hint: Make sure to also discuss the impact on the general price level, and specify any assumptions you make.
Question a. In 1992, Australia’s official unemployment rate was over 10 percent. Since then, the proportion of jobs in the economy that are part-time has increased while our measured rate of unemployment is now around 5 percent.
• What are the implications of an increasing part-time work-force when comparing unemployment rates between 1992 and today?
• The article mentions NAIRU, which it defines as the “non-accelerating-inflation rate of unemployment”, but the AD-AS model focuses on the natural rate. Define what is meant by the natural rate of unemployment and explain its relationship to the LRAS (long run aggregate supply curve).
Finally, consider the statement …This suggests that, in our newly stagnant world, the true NAIRU is a lot lower: 4.5 per cent, maybe 4 per cent… Using the static AD-AS model, discuss what might happen if the government incorrectly assumes the NAIRU is still 5 percent when it really is 4 percent and stimulates demand to reduce unemployment.
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