Analysis On Economic Stability Samples †MyAssignmenthelp.com

Question: Discuss about the Analysis On Economic Stability. Answer: 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 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. Lets 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 equilibr ium 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. 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. 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. 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; 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. 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. 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 governments strong economic policies and instruments of regulatory framework can restore the stability of the economy. 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 NewMicroeconomics (Routledge Revivals): The Critical Foundations. Routledge. Corsetti, G., Kuester, K., Meier, A., Mller, 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.