Q1 - Responses to Higher Costs of Living and Inflation in Australia

Economic life has become more expensive of late. The costs of living in Australia have gone up dramatically over the past couple of years owing in part to the accumulated effect of past high inflation. Yet, it is difficult for policymakers to alleviate cost-of-living pressures alongside high interest rates, while inflation remains sticky. Read the following articles related to part 1a and part 1b, respectively:

For 1a,

1. Verrender, Ian (2024) 'Why further interest rate hikes by the Reserve Bank won't fix Australia's inflation problem', ABC News, May 7th, available: https://www.abc.net.au/news/2024-05-07/interest-rate-hikes-wont-fix-our-inflation-problem/103809160

2. RBA (2024) Statement on Monetary Policy - May 2024, available: https://www.rba.gov.au/publications/smp/2024/may/overview.html

3. Martin, Peter (2024) 'If the RBA's right, interest rates may not fall for another year. Here's why - and what it means for next week's budget', The Conversation, May 7th, available: https://theconversation.com/if-the-rbas-right-interest-rates-may-not-fall-for-another year-heres-why-and-what-it-means-for-next-weeks-budget-229376

For 1b,

4. Crowley, Tom and Melissa Clarke (2024) 'Most taxpayers to get $804, but high-end tax cut halved as government rewrites stage 3', ABC News, January 24th, available: https://www.abc.net.au/news/2024-01-24/government-rewrites-stage-three-tax-cuts/103383642

5. Amin, Mridula and Alex Lim (2024) 'This isn't the 30s I was promised', ABC News, March 28th, available: https://www.abc.net.au/news/2024-03-28/data-on-30-year-old-australians-shows-financial-hardship/103528726

6. Duffy, Connor (2024) 'HECS indexation to be overhauled in budget with $3 billion in student debt 'wiped out'', ABC News, May 5th, available: https://www.abc.net.au/news/2024-05-05/help-hecs-debt-indexation-2024-cut-easier-to-pay-off/103800692

a) Consider the stance of monetary policy to the recent positive shock and assume the RBA's forecasts over the next 12 or so months are accurate [see source 2]. Use the multiplier AD model and Phillips curve diagram to illustrate and explain in detail how the aggregate demand function in the Australian economy is expected to shift if the RBA's goal is to tame inflation expectations and have the unemployment rate of 4.3% in June 2025. Begin your economy in June 2023 with an unemployment rate of 3.5%. [350 or so words should be sufficient for Q1a] 6 marks for quality of analysis, including linked diagrams

b) Consider Australians in their early to mid-30s and assume the following about these younger generation: they are millennials working fulltime on a steady annual salary of $110,000 (before tax), with a $500,000 housing loan and a $30,000 university loan. Use a figure with income and consumption on the vertical axis and time on the horizontal axis to illustrate and discuss the way in which these millennials would typically respond to the upcoming tax cuts and HECS debt relief. In your answer, elaborate on the disadvantages faced by these millennials over older generations of Australians (late 50s) who have paid off their mortgage. [350 or so words should be sufficient for Q1b]