Fiscal- Price stability

Price stability is the maintenance of inflation between 2-3% to maintain inflationary

pressures. Fiscal policy is not implemented with the objective of maintaining price
stability but affecting it indirectly through the government's manipulation of the
budget through expansionary and contractionary stances, to control inflation. In
response to post GFC recovery that caused demand-pull inflationary pressures, the
2011-12 annual budget adopted a contractionary stance, which resulted in the fiscal
deficit falling 1.9% of GDP. Consequently, inflation dropped from an average of 3.1%
in 2010-11 to 2.1% in 2011-12, despite sustained interest rates, highlighting FPs
success in maintaining price stability.

Monetary- Price stability

Following on, Monetary policy is the main instrument used to affect achieve price
stability, which has been effective in sustaining EG at a level that has not created

excessive inflationary pressures. By targeting a transparent and credible 2-3%

inflation threshold over the business cycle, MP has effectively anchored inflationary
expectations thus dampening fears of a wage price spiral. In fact, since 1993 Australia
has not experienced such a self-perpetuating cycle, and inflation has averaged 2.7%
compared to 7.7% from 1966-1992. This stable rate has also alleviated the risk of a
recession-which high inflation is a precursor to- evidenced by Australias 21 years of
consecutive EG at an average of 3.9%p.a. Thus monetary policy has been
instrumental in maintaining a sustainable EG and inflation.