Unit 3: Australia's Economic Prosperity
Core concepts to master
Unit 3 analyses Australia's macroeconomic performance and the goals of policy. Know the objectives: strong and sustainable growth, full employment, price stability (the 2–3% inflation target), and external balance. Understand aggregate demand (C + I + G + X − M) and aggregate supply components, and how each shifts. Study the labour market - participation rate, underemployment, wage determination - and productivity as the long-run driver of living standards. Learn the balance of payments (current account, capital and financial account), the terms of trade, and the exchange rate (appreciation/depreciation causes and effects). Know the budget (headline vs underlying cash balance) and the difference between cyclical and structural components.
Traps examiners set
- Confusing a deficit with bad policy. A deficit can be appropriate in a downturn; the structural position matters more.
- Assuming a depreciation always helps. It raises import prices and can feed inflation, and benefits depend on export elasticity.
- Mixing current account and capital account. A current account deficit is matched by a capital and financial account surplus.
- Treating underemployment as employment. Hours worked matter for spare capacity.
- Forgetting lags. Fiscal and monetary policy affect the economy with a delay.
Worked rule of thumb
For exchange-rate questions, use a demand-and-supply for the dollar framework: higher Australian interest rates attract capital inflow, raising demand for the dollar and causing appreciation. Trace consequences: cheaper imports, dearer exports, lower import prices, downward pressure on inflation. Always trace the chain of effects rather than stating a single outcome.