Economic Stability of the Australian Economy

This assignment explores the concept of economic equilibrium and applies it to the Australian economy. It examines the characteristics of a stable equilibrium and provides evidence of Australia's sustained economic growth and stability over recent decades. The role of the Reserve Bank of Australia (RBA) in managing interest rates and inflation to maintain economic stability is also discussed.

Running head: ECONOMIC OF BUSINESS 1
Economic of Business
Student’s Name
University’s Name

ECONOMIC OF BUSINESS 2
Equilibrium
The term equilibrium stands for equal balance. According to physics, an object is referred
to be in the state of balance when two forces of equal magnitude working in opposite direction
balance each other. This concept of physics is not limited to it but is also applicable to economics
and, the economists term it as equilibrium economics. Equilibrium is a state where any further
change is not possible or applicable and two acting forces are not able to influence each other
(Ponnusamy, 2017).
Stable Equilibrium
Stable equilibrium - In stable equilibrium, if the economy of a company gets disrupted
due to the change in any of its determining factors, it resumes back to the original point after
self-adjustment and the original equilibrium is stored again. There is no net change in the initial
and final equilibrium state of the company. This equilibrium can be observed when the demand
price is equal to the supply price and there is no tendency of increase in the total amount
produced. At this stage, the stable equilibrium is maintained. It can be compared to the pendulum
as well which comes back to its original position just after it gets displaced (Conspecte.com,
2017).
Concept of Stable Equilibrium
In macroeconomics, when aggregate demand = aggregate supply, the stable equilibrium is
established for the country. The factors that influence aggregate demand can be written as-
C + I + G + Nx = increase or decrease in DD

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Where, P - price
 Q - quantity of good
 S - supply
 D - demand
 P0 - price of market balance
 A - surplus of demand - when P<P0
 B - surplus of supply - when P>P0
In the above plotted graph between Price and quantity of the consumer product. This is a
classical stable equilibrium example in economics. SS stands for a positively sloped demand
curve and DD stands for a negatively sloped demand curve. Point E is the point of equilibrium
where the supply and the demand are balanced. At this point only, OP (the equilibrium Price)
and OQ (the equilibrium quantity) are determined.
In a case when the supplied quantity is more than the quantity demanded, the surplus
quantity will be to the level of AB. This forms a downward pressure on the price in the market.
This pressure is kept applied downwards until the state of equilibrium is attained, i.e., the
quantity demanded equals the quantity supplied - (Surplus)

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In a case when supplied quantity is less than the demanded quantity, it leads to shortage of the
product in the market. This applies an upward pressure on the price of the product in the market
and it pushes up the price to the level of equilibrium where the supplied quantity equals the
demanded quantity - (Deficit) (Sharov, 1996)
Is Australian Economy Stable?
The economy of Australia is quite stable and resilient. It does not face major changes
either progressive or regressive and comes back to its original value with minor alterations.
Following the trend of GDP growth in Australia from the last 2-3 years, the GDP growth rate has
remained to a value between 2.1% to 2.8%. This shows a stable yet growing trend of Australian
economy. This stability is due to the following three reasons - housing, shopping, and mining
(Jericho, 2016).
The economy of Australia hit a recession in 1991 - 92 and from then, Australian economy
has been recession free for last 26 years. The Australian economy is the second largest world
economy that has not hit a recession for the longest time after Netherlands. The policies of RBA
have kept Australia in such intact position. The RBA keeps the likelihood of financial instability
reduces by keeping the inflation low (Reserve Bank of Australia, 2017). For this, the bank
assesses a diverse range of aggregate economic and financial data to understand the stability of
financial system. RBA also ensures the safety of the payment systems. It shares its views with
CFR, APRA, and The Treasury on a regular basis. RBA controls the interest rate through its
monetary policy. The monetary policy involves setting the interest rates in the market which, in
turn, affects the inflation rate. In case of change in the interest rate, RBA controls the supply of
the money (Hutchens, 2017).

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A comparison between interest rate and inflation rate of Australia
Yea
r
Interest Rate Inflation rate
2012 3.00% 1.8%
2013 2.50% 2.5%
2014 2.50% 2.5%
2015 2.00% 1.5%
2016 1.50% 1.3%
Conclusion
Australia has maintained a stable equilibrium since the time it last hit recession. The
policies designed by RBA are so effective and efficient that control the interest and the inflation
rate. The increase in the interest rate eventually leads to inflation and the policies designed by
Australian Reserve Bank have coped up with such problems well since last 25 years.
References
Conspecte.com. (2017). Economic equilibrium : a system of free markets is stable. Retrieved
from Conspecte.com: https://conspecte.com/Economics/economic-equilibrium-a-system-
of-free-markets-is-stable.html
Hutchens, G. (2017). Australia's economy likely to keep growing in 2017, experts say. Retrieved
from www.theguardian.com:
https://www.theguardian.com/business/2017/feb/14/australias-economy-likely-to-keep-
growing-in-2017-experts-say

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Jericho, G. (2016). Three reasons Australia's economy is so resilient . Retrieved from
www.theguardian.com:
https://www.theguardian.com/business/grogonomics/2016/mar/03/three-reasons-
australias-economy-is-so-resilient-shopping-housing-and-yes-mining#img-1
Ponnusamy, S. (2017). Stable and Unstable Equilibrium. Retrieved from /owlcation.com:
https://owlcation.com/social-sciences/Stable-and-Unstable-Equilibrium
Reserve Bank of Australia. (2017). Monetary Policy. Retrieved from Rba.gov.au:
http://www.rba.gov.au/monetary-policy/
Sharov, A. (1996). Equilibrium: Stable or Unstable? Retrieved from www.ma.utexas.edu:
https://www.ma.utexas.edu/users/davis/375/popecol/lec9/equilib.html