Analyse the consequences of inflation and evaluate the performance of the Australian economy in relation to its inflation objectives in recent years.
             Inflation is the sustained increase in the general level of prices over a period of time. The two main types of inflation are demand pull inflation, that is inflation caused by excess aggregate demand caused by excess supply, and cost push inflation caused from the supply side of the economy by an increase in production costs leading to a decline in aggregated supply which forces up the price level.
             Inflation has many negative effects including a decline in the purchasing power of money and can cause a fall in real incomes and distort resource allocation. Both macroeconomic and microeconomic policies have been utilized by the Australian economy to achieve highly successful rates of contained inflation. Although traditional Keynesian theory argues that fiscal policy should be used to reduce the inflationary gap, monetary policy is the key instrument used by the Australian economy to target inflation. The Reserve Bank of Australia (RBA) has managed to achieve its objectives due to major changes to its structure. The RBA is now independent of the political cycle, it targets 2-3% and it is aware of the time lags associated with interest rate adjustments. Microeconomic policies have reduced cost inflation by increasing productivity and aggregate supply.
             GDP1 GDP2
             There are many negative consequences of inflation. As can be seen in figure 1 inflation increases prices from p1 to p2. The most significant negative impacts include:
             - Reduced living standards as a result of falling real wages. Those on high incomes and with strong bargaining power are usually compensated with higher incomes when inflation occurs. However those on low incomes tend to have weak bargaining power and thus are not rewarded with higher wages. They must th...