Therefore, impact of government debt in Australia will not be as bad as in Greek. Besides, government debt in Greece has caused greater concern because of their higher foreign debt. If Greek government defaults, that would affect the European Central Bank (CB) as CB is major lender to Greece. For example, German banks held $22. Ban of Greek government debt. As if Greece couldn’t pay the debt, the economy in European countries would be greatly affected. (b) Terms of trade is a measure of the ratio of export prices to import prices.

From Figure 2, the terms of trade of Australia is in a favorable trend. An improving terms of trade indicates that Australia’s export price rises faster than import price. In 2008, Australia exports were more that imports, especially mineral resources like coal and mine, which are simply transform manufactured. For example, in 2008, China imported large amount of mineral resources such as coal from Australia for preparation of Olympics Game. An increase in export earnings had reduced the current account deficit of Australia.

Current account balance of Australia in 2008 has improved from approximately -7% to -2. 2% as shown in Figure 3. (c) Exchange rate in Australia is the value of Australia dollar (ADD) expressed in terms of foreign currencies. After a surprise fall in Australia’s unemployment rate in first two weeks of May, ADD spikes. According to the current exchange rate of ADD against other currencies, ADD is still overall higher than other countries such as Japan (AUDIO* ! 79. 97 on 17. 05. 2012). Australian goods are less competitive and exports are dearer, in turn, imports are now cheaper.

More people including locals and foreigners will tend to buy cheaper odds from foreign in global market compared to local goods in Australia. This scenario will cause local manufacturers find it difficult to compete in global markets as their manufactures are less competitive. (d) A worsening rate of inflation (increase in price of goods) may reduce the economic growth of Australia. When price of local goods increases from Pl to UP (in Diagram 1), Australian goods become less competitive, as imports are cheaper. Local firms and exporters will tend to reduce their production due to lesser demand from consumers.

Besides, a worsening inflation rate discourages foreign direct investment and local investment due to increase in production cost and industrial unrest. Reduce in production level may lead to a lower economic growth. A decrease in total output and an increase in price from Pl to UP, will lead to a decreasing rate of real GAP (Gross Domestic Product) from Yell to YE, referring to Diagram 1 . Hence, Australians economic growth slows down. Diagram 1 2(a) Drop in production cost due to fall in labor costs will cause aggregate supply (AS) to shift to the right. Diagram (b) Even though there has been a loss of jobs, there might be a fall in employment rate. This is because when job opportunities become less, more people are discouraged from looking for work but they are still willing to work if jobs are available. Those workers are called as discouraged workers, who are involved in hidden unemployment. The hidden unemployed are not counted as officially unemployed as they are not actively looking for a job. As the number of hidden unemployed increases, the officially unemployment rate will decrease as more people are not counted as unemployed. C) When economy was operating “below capacity”, there will be a recessionary AP. Diagram 3 ICP ASS (d) When the economy is operating below capacity, there is a recessionary gap, which sometimes called unemployment gap as illustrated in Diagram 3 (part c). Following the global financial crisis (SGF), the economy was said to be below capacity for some times and that will affect one of the government’s macroeconomic objectives which is price stability. Unemployment/ recessionary gap occurs when unemployment rate rises above its natural rate. When there are more unemployed, confidence level of consumers will reduce.

That may dad to the overall purchasing of consumers decreases and aggregate demand falls as consumers will tend save more and spend less due to loss of jobs. As the aggregate demand falls, the country might experience decreasing inflation rate. As referring to Diagram 4 below, aggregate demand is shifted to left, leading to a decreasing in consumer price index (ICP). This indicates that inflation rate falls, in long run, it may lead to deflation. AD DAD DAD Yell Ye WFM yell ye WFM Real GAP Diagram 4 For example, in 2008-09, the rate of Australia’s annual inflation remained relatively low at around 3% during SGF.

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