SECTION B: Short Answers. Section B carries 30 marks.
Answer ONE of the following questions in your answer booklet.
EITHER Question B1
Read the article below entitled “Jobless low fuels inflation” (David Uren, The Australian, Feb
21 2008) and answer all of the following questions:
(Please provide question numbers on your answer sheet):
Jobless low fuels inflation
David Uren, Economics correspondent | February 21, 2008
THE Treasury Department believes the unemployment rate has dropped to a level that is
pushing up inflation. While Treasury chief economist David Gruen told a Senate estimates
committee yesterday it was not possible to be precise about what the tipping point was, "the
current rate of unemployment may be inconsistent with steady inflation".
Dr Gruen's comments yesterday came as new figures on wages showed a slow, steady
increase, with those in the private sector rising at an annual rate of 4.3 per cent, the fastest
in at least 10 years, and an increase from 3.8per cent a year ago.[….]
"You don't need to be Einstein to know you can't keep doing that for ever," he said. 'At some
point that process comes to a halt. As the unemployment rate has come down, the evidence
of supply constraints has become more pronounced."
Dr Gruen said the RBA strategy of raising interest rates was the most effective method of
bringing inflation under control, but budget cuts proposed by the Rudd Government would
"Monetary policy responds quickly, and for that reason is our primary tool around demand
management," he said. [….]
Dr Gruen said that although tax cuts put more money into people's pockets, adding to
demand, it was important to look at the budget as a whole.
"If the Government does as the Prime Minister says it would do, running a budget surplus of
at least 1.5 per cent of GDP and, saving revenue surprises, that would be a material
tightening of fiscal policy compared with the situation as we anticipated it, and that would
make some contribution to reduce aggregate demand," he said.
See B1 questions on the next page.
ECON1007 Macroeconomics Examination SP2 2008 Guides
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