Economics Report: Stable Equilibrium in Australian Economy

This economics report delves into the concept of stable equilibrium, examining how market forces and government interventions maintain economic stability. It begins by defining stable equilibrium and illustrating the adjustment mechanism using supply and demand curves. The report then shifts its focus to the Australian economy, analyzing its GDP and inflation rate trends from 2006 to 2016, demonstrating its relatively stable economic growth. It discusses the role of government in maintaining stability through fiscal and monetary policies, including automatic and structural stabilizers. The analysis concludes that the Australian economy demonstrates a stable dynamic equilibrium, supported by strong economic policies and regulatory frameworks, which help restore stability in the face of economic fluctuations. The report uses data from Tradingeconomics.com to support its arguments and concludes with a discussion of policy frameworks.

Running head: ECONOMICS; STABLE EQUILIBRIUM
Economics; Stable Equilibrium
Name of the Student
Name of the University
Author note

1ECONOMICS; STABLE EQUILIBRIUM
Table of Contents
Introduction......................................................................................................................................2
Stability Analysis.............................................................................................................................2
Intervention of the Government.......................................................................................................3
Australian Economy: Stability Scenario:.........................................................................................4
Policy Framework:...........................................................................................................................6
Conclusion:......................................................................................................................................6
References........................................................................................................................................8

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Introduction
The paper conducts an analysis on economic stability. Microeconomic stability implies
stability in a single market whereas macroeconomic stability means stability in some major
indicators. A stable economy is defined as one that manages to minimize vulnerability from
external shocks. In a single market, price works as an invisible hand to maintain stability.
Australia is one of the developed nations relying on the market-based decision. Current stability
of the Australian economy is prime concern of this paper. GDP and price level trends and
corresponding government policies related to stability are discussed.
Stability Analysis
Figure 1: Stability adjustment

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(Source: as created by author)
The above figure explains stability adjustment mechanism with the forces of demand and supply.
Point E defines the standard equilibrium position obtained from prevailing demand and supply
condition (Kreindler & Young, 2013). Point E entails P* as equilibrium price and Q* as
equilibrium quantity. Any deviation from E, if rings back equilibrium again then E is defined as
a stable equilibrium. Consider the deviation of price from the equilibrium price. Let’s consider
price increases from P0 to P1. At this price, suppliers in the market supply a larger quantity, QS1.
The buyers on the other hand demand a less quantity, QD1. At price P1 the market will have an
excess supply. To match supply with demand price has to be reduced to equilibrium level. Now
suppose price decreases to P2. Lower price encourage buyers to demand more, demand rises to
QD2, Supply will reduce at the lower price and become QS2. At price P2, there exists an excess
demand. Here, price will increase to attain the equilibrium level (Boland, 2014). Therefore, price
is the main adjustment mechanism for restoring stability.
Intervention of the Government
Government is a central authority that takes proper steps whenever the economy is at
risk. Stability for the overall economy cannot be maintained as easily as described above.
Aggregate demand replaces the individual demand curve and aggregate supply replaces
individual supply in macroeconomic analysis (Ball, Sadka & Tseng, 2016). Aggregate supply
and aggregate demand together determines output and price level. However, the economy does
not always remain stable autonomously. Then government intervenes in the market using fiscal
and monetary policy tool. Fiscal policy instruments are taxation and government expenditures.

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Money supply is the only tool used under monetary policy. Both are demand sided policies and
works through its countercyclical effect on aggregate demand (Corsetti et al., 2013)
Australian Economy: Stability Scenario:
The economy of Australia can be classified as the capitalistic economy. The government
of Australia plays a role of supervisor rather than acting as the regulator. The economic decision
of the Australia is not reliant on the centralized method of planning rather it is more reliant on
the demand and supply factors present in the market (Rader, 2014). The suppliers often take the
pricing decision that forms the foundations of price dynamics in the domestic and overseas
market. Though the ultimate motive is to maximise profit however customer satisfaction also
forms an important criterion.
The Australian economy stability can assessed with the help of statistics obtained from
the GDP in the recent years.
Figure 2: Figure representing GDP of Australia (2006-2016)
(Source: Tradingeconomics.com, 2017)

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The above defined statistical figure represents that the Australian GDP growth rate over
the span of six years has remained consistent. In spite of the numerous variations, the variations
in GDP does not represents a large decline with the Australian GDP has been on gradual increase
from 853.76 billion USD in the economic year 2006 to 1204.62 billion USD for the year 2016
(Tradingeconomics.com, 2017). The data derived from the GDP growth rate represents a
somewhat better economic growth however, following the year 2013 where Australia recorded a
highest GDP growth rate of 1567.18 billion USD; the GDP of Australia has somewhat not been
able to repeat that performance.
The prevailing overall price level of Australia reflects the stability scenario because
variations in the price level significantly contributes to the deviations in equilibrium. The
prevailing rate of inflation reflects the changing aspects of price levels of a nation.
Figure 3: Figure representing Inflation Rate in Australia

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(Source: Tradingeconomics.com, 2017)
As evident from the above stated figure, it can be ascertained that the inflation rate of
Australia, similar to GDP, is understood to be steady and reasonable. In spite of the occasional
variations, there has not been any instances of significant fluctuations in inflations.
Policy Framework:
On the event of economic fluctuations every nations makes the use of different tools in order
to stabilize the economy, they are namely;
I. Automatic Stabilizer: An automatic stabilizer makes the use of the tax and expenditure
structure of the government. The method represents a counter cyclic procedure of
influencing the aggregate demand in an economy without creating an influence on the
treasuries of the government (McLean, 2012). With the help of this tool, adjustments in
budget is made by turning the deficit into surplus. Automatic stabilizer tool also uses the
tax structure CGT and GST in its system to stabilize the economic conditions.
II. Structural Stabilizer: Structural Stabilizer comprises of the introducing the changes in
the budgetary situations along with the changes in the structure of tax, introducing new
structures of taxation and expenses having impact on the aggregate demand in an
economy (Rios et al., 2013). Structural stabilizing policies are undertaken on the event of
severe economic fluctuations, when automatic stabilizer fails to introduce equilibrium in
economy.

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Conclusion:
To conclude with, it can be stated that the stability equilibrium is attained when an
economy returns to the normal equilibrium level. In regard to the above defined concepts an
assertion can be put forward by stating that Australian economy is reliant on market dynamics to
attain stability. Currently, Australian economy can be classified as the stable dynamic
equilibrium economy. On the event of variations, the government’s strong economic policies and
instruments of regulatory framework can restore the stability of the economy.

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References
Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News.
(2017). Tradingeconomics.com. Retrieved 22 September 2017, from
https://tradingeconomics.com/australia/gdp
Ball, R., Sadka, G., & Tseng, A. (2016). Aggregate Supply and Demand Shocks and Asset
Prices.
Boland, L. A. (2014). Methodology for a New Microeconomics (Routledge Revivals): The
Critical Foundations. Routledge.
Corsetti, G., Kuester, K., Meier, A., & Müller, G. J. (2013). Sovereign risk, fiscal policy, and
macroeconomic stability. The Economic Journal, 123(566).
Kreindler, G. E., & Young, H. P. (2013). Fast convergence in evolutionary equilibrium
selection. Games and Economic Behavior, 80, 39-67.
McLean, I. W. (2012). Why Australia prospered: The shifting sources of economic growth.
Princeton University Press.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and
policies. McGraw-Hill.