| Date | Cash Rate (%) | Inflation Target (%) | CPI Inflation Rate (%) |
|---|---|---|---|
| Mar 12 | 4.25 | 2.5 | 1.6 |
| Sep 12 | 3.25 | 2.5 | 2.0 |
| Mar 13 | 3.00 | 2.5 | 2.5 |
| Sep 13 | 2.50 | 2.5 | 2.2 |
| Mar 14 | 2.50 | 2.5 | 2.9 |
| Sep 14 | 2.50 | 2.5 | 2.3 |
The Reserve Bank of Australia (RBA) has an inflation target of keeping consumer price inflation between 2 and 3 percent, on average, over the medium term. This target is an anchor for monetary policy decisions. If the economy experiences a significant slowdown, actual output may fall below the economy's productive potential. Under such circumstances, the RBA typically lowers its key policy rate—the cash rate—to stimulate aggregate demand and prevent inflation from falling below the target band. (lines 1–7)
Throughout 2013, the RBA's Board observed that while the mining investment boom was transitionally cooling, other sectors of the domestic economy were slow to pick up the slack. GDP growth remained below its long-term trend, leading to a rising unemployment rate and subdued wage growth. (lines 1–4)
Although some export volumes remained strong, domestic demand was weak. Firm surveys indicated widespread spare capacity, and the Reserve Bank estimated that a widening negative output gap had developed. As a result, price pressures remained extremely contained, and the Board decided to keep the cash rate at historically low levels to support economic expansion and gradually close the gap. (lines 5–10)
Question:
Define the term 'negative output gap' (Extract C, line 8).
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.