Reference no: EM1382944

Question

The following exchange comes from testimony given by the Governor of the Reserve Bank of Australia, Glenn Stevens, before the Commonwealth Parliament's Standing Committee on Economics - on the 26th of August, 2011.

CHAIR: I will go to a story which has not been so good since the mid-2000s, productivity growth. You have referred in a couple of your speeches to the fact that it has not been looking as good as it should be since about the mid-2000s. I assume that was part of a trend. I assume it did not happen quickly. Is that a case of good times making you a little bit fat, if you like?

Mr Stevens : It is not a conclusion I was that keen to draw myself for quite a while, but I think you cannot avoid concluding from all the figures we have that productivity growth has slowed. It has slowed in a number of countries, not just here. I think I would be right in saying that it probably seems more pronounced here.

Suppose there is a sustained, exogenous increase in aggregate demand. Using the aggregate-demand/aggregate supply model, explain why the Governor (and the Board of the Reserve Bank) might be concerned about a slowdown in productivity growth . (In other words, explain the implications for monetary policy due to this slowdown).