Economic Stability and Government Intervention

This assignment examines the concept of economic stability, exploring both microeconomic and macroeconomic aspects. It delves into the Australian economy specifically, analyzing its performance in terms of GDP growth, inflation rate, and unemployment levels. The role of government policies and interventions in maintaining economic stability is also discussed, highlighting Australia's approach to using automatic stabilizers and discretionary stabilizers.

Running head: EONOMIC STABILITY
Economic Stability
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction......................................................................................................................................2
Stability Definition..........................................................................................................................2
Government intervention and health of the economy......................................................................4
Australian Economy; Stability.........................................................................................................4
Stability policies in Australia...........................................................................................................8
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

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Introduction
Stability in an economy refers to a stable condition in different macroeconomic
indicators. For any single market, equilibrium is ensured by the demand and supply condition in
the market. Once equilibrium is determined in the market demand and supply forces interact to
maintain stability. The operation of price mechanism as an invisible hand restores equilibrium.
The concept of microeconomic stability is needed to understand macroeconomic stability.
However, it macroeconomic stability should analyzed with a broad spectrum. In this paper,
economic stability of Australia is discussed under the purview of indicators such as gross
domestic product, inflation, unemployment and external stability.
Stability Definition
Stability symbolizes a resting state that can be restored without any exogenous forces.
The adjustment of stability is best understood in terms of microeconomic stability in terms of
supply and demand forces.

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Figure 1: Stability adjustment
(Source: as created by the Author)
The equilibrium outcome from the above figure is obtained as P* as equilibrium price
and Q* as equilibrium price. Consider price revised upward to P1. At an increased price, demand
decreases while supply increases. An excess supply resulted from this fact. The excess supply
will be absorbed only when there is a reduction is price. Therefore, price starts falling. This will
continue unless price reaches to the original equilibrium position P*. Conversely, the adjustment
is opposite when price falls below the equilibrium price say at P2. At the price an excess demand
is resulted from the fact that demand at this price exceeds its existing supply (Zinn et al., 2016).
To cut the demand price has to be increased from P2. Therefore, price again moves towards

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equilibrium price. This explains why E is a stable equilibrium point. Any deviation from E
moves back to this point without any intervention. The stability adjusts is autonomous.
The aspect is broad when the overall economy is concerned. The demand and supply
forces considered here are the forces of aggregated demand and aggregate supply. Aggregate
supply is summation of expenditure in an economy. In captures the overall demand of the
economy. It is also considered as planned expenditure. Aggregate supply represents actual
expenditure of the economy.
Government intervention and health of the economy
Stability for the economy as a whole needs consideration on a broad spectrum. The forces
of aggregate demand and aggregate supply cannot always maintain economic stability
autonomously. In this situation, government policy intervention becomes necessary.
Government has two major policy tools to intervene in an economy. One is fiscal policy
instrument and other is monetary policy instrument. Fiscal policy uses tools of direct taxation or
government spending to affect GDP of the economy (Goodwin et al., 2013). Monetary policy
tool is used for maintaining stability of the price level. Monetary policy works using through
adjustment available money supply. Government uses other stabilization instrument to maintain
stability in the economy.
Australian Economy; Stability
Australia is a market dependent economy. There is no centralized planning following
which economic activities are guided. Major decisions are taken in the economy in the
marketplace through interaction of demand and supply forces. Australia engages in international

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affairs thorough trade, investment and other transaction (Groenewegen & McFarlane, 2014).
Hence, stability for the external economies also matters for Australian economy.
GDP statistics
GDP stands for representing market values of goods and services in an economy. The
goods and services produced within the economy is computed using the market value of goods
and services produced. In Australia, Australian Bureau of Labor statistics computes GDP statistic
(rba.gov.au, 2017). A stable GDP implies stability for the economy. However, GDP is not a
complete measure of well being. Still it is considered as a primary determinant factor of stability.
Figure 2: Trend in GDP for Australia
(Source: stlouisfed.org, 2017)
From the above GDP statistics, a stable trend in GDP is obtained for the last ten years.
GDP grows overtime in Australia, which implies stability in income and other related indicators.

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Unemployment
As mentioned earlier GDP alone cannot give complete scenario of the economy.
Therefore, other indicators need to be evaluated. One such important indicator is unemployment
statistics. The division of working age population in Australia is given in the following flow
chart.
Figure 3: Division of working age population in Australia

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Figure 4: Unemployment rate in Australia
(Source: stlouisfed.org, 2017)
The problem of unemployment substantially reduced overtime. Unemployment rate
peaked up in 2009, partly due to global recession in 2008. After that, unemployment remains
almost stable (Gregory & Smith, 2016). People in Australia remain unemployed for a
comparatively for a short time period. Approximately 60 percent of workforce those remain
unemployed was unemployed for less than six month. Nearly 44 percent was unemployed for
less than 13 weeks.
Price Level
Overall stability of the economy is measured in terms of inflation trend. Fluctuation in
the price level indicates unstable condition for the economy.

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Figure 5: Inflation rate in Australia
(Source: tradingeconomics.com, 2017)
Australia is successful in maintain a stable state of price level. Inflation rate reduces
gradually and remain at a moderate to low level (worldbank.org, 2017).
Stability policies in Australia
Automatic stabilizer and Discretionary stabilizers are used for maintain stability in the
crisis period. Automatic stabilizers are developed using direct tool of direct tax or government
spending. However, Automatic stabilizers do not have direct influence on federal policy
structure. Discretionary stabilizers are intensive measures for maintaining stability. Government
here introduces new types of tax or makes some significant changes in its policy framework.
Conclusion
The report aimed at conduction a research analysis on economic stability and particular
areas of government intervention for maintaining for maintaining a good health of the economy.

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Microeconomic stability is restored with the adjustment of price mechanism. In case of
macroeconomic stability, aggregate demand and aggregate supply are considered and
government often actively intervenes to maintain stability of the economy. Particular focus is
given on the Australian economy. Australia maintains a stable state in its GDP, inflation and
unemployment level. Moreover, there are stabilization instrument to maintain stability for
Australian economy.

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References
Australia Inflation Rate | 1951-2017 | Data | Chart | Calendar | Forecast.
(2017). Tradingeconomics.com. Retrieved 23 September 2017, from
https://tradingeconomics.com/australia/inflation-cpi
Current Price Gross Domestic Product in Australia©. (2017). Fred.stlouisfed.org. Retrieved 23
September 2017, from https://fred.stlouisfed.org/series/AUSGDPNQDSMEI
Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013). Macroeconomics in context.
ME Sharpe.
Gregory, R. G., & Smith, R. E. (2016). 15 Unemployment, Inflation and Job Creation Policies in
Australia. Inflation and Unemployment: Theory, Experience and Policy Making, 325.
Groenewegen, P., & McFarlane, B. (2014). A History of Australian Economic Thought
(Routledge Revivals). Routledge.
Measures of Consumer Price Inflation | RBA. (2017). Reserve Bank of Australia. Retrieved 23
September 2017, from http://www.rba.gov.au/inflation/measures-cpi.html
Unemployment, total (% of total labor force) (modeled ILO estimate) | Data.
(2017). Data.worldbank.org. Retrieved 23 September 2017, from
https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?
end=2016&locations=AU&start=2005&view=chart
Zinn, J., Arjomand, L., Finlay, N., Kheirandish, R., & Solomon, G. (2016). Principles of
Microeconomics.