Assignment 3 consists of two problems worth 5 marks each. Text material which may be relevant to the question may be drawn from any of text chapters 12, 13 and 14. Question 1 Using data from the...

Question 1
Using data from the Australian Bureau of Statistics (ABS) http://www.abs.gov.au/ collect information on unemployment and inflation rates for Australia over the period 2001 to 2016, inclusive. Employ annual data. Be explicit and define and provide sources for the data obtained.
Plot on a single diagram the relationship between inflation and unemployment, measuring inflation on the vertical axis and unemployment on the horizontal axis. Comment on whether any relationship exists between these variables and any implications of your findings.
    Year
    unemployment rate
    Inflation rate
    2001 [YR2001]
    6.699999809
    4.380841121
    2002 [YR2002]
    6.400000095
    3.00317105
    2003 [YR2003]
    5.900000095
    2.770735241
    2004 [YR2004]
    5.400000095
    2.343612335
    2005 [YR2005]
    5
    2.668732782
    2006 [YR2006]
    4.800000191
    3.538487339
    2007 [YR2007]
    4.400000095
    2.332361516
    2008 [YR2008]
    4.199999809
    4.352643242
    2009 [YR2009]
    5.599999905
    1.82011224
    2010 [YR2010]
    5.199999809
    2.845225682
    2011 [YR2011]
    5.099999905
    3.303850156
    2012 [YR2012]
    5.199999809
    1.762780156
    2013 [YR2013]
    5.699999809
    2.449888641
    2014 [YR2014]
    6.099999905
    2.487922705
    2015 [YR2015]
    6.099999905
    1.508366722
    2016 [YR2016]
    5.699999809
    1.276990945
The above table shows the data for unemployment rate and inflation rate of Australia for the time period of 1990-2016. The data is collected from ABS website. The data is plotted in the single graph where the unemployment is measured along the X axis and the inflation is measured along the Y axis. According to the Philips curve model, there exists an inverse relation between inflation and unemployment rate. The short run Philips curve is downward sloping but in the long run the relation is not valid. This is because the long run aggregate supply curve is vertical.
RBA has out the NAIRU as 5% for Australia. The NAIRU provides the benchmark for assessing the spare capacity. As per the data released by ABS, Australia is operating below the full employment level. Australia’s labor market is consistent with weak wage growth. On the positive side, the labour market is tightening with falling unemployment rate. The bad news for the workers is despite the low unemployment rate, the wage growth remains low for the longer period of time.
The low unemployment rate is desirable but the unemployment is falling at a slower pace. Wage growth is not lifted despite the fall in unemployment rate. This is an unusual occurrence, normally when unemployment rate decline, wage growth is expected to rise. The above chart further shows such unusual occurrence when the both the unemployment rate and the inflation rate are low at the same time. It is a wide perception that underemployment rate is not captured. NAIRU is measured only on the basis of unemployment rate as the slack of labour market but it does not include underemployment rate. Actually, unemployment is not sufficient to measure the labour market slack, we need to consider the underemployment also. The bargaining power for employee is also lower now - this is another reason for the low wage growth. (Gareth Aird, 2018)
The trend line is drawn in the above chart that shows an inverse relation...