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ECO201 Foundations of Economics

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Analyse the given current economic scenario (see below) and reflect on how the economic agents reciprocate to the scenario. Each group will then produce a report with summary of the scenario and answer the questions as asked at the end of the project.  

For this report, it is mandatory for the students to provide a summary of the scenario, reflect and utilise the appropriate theoretical framework and analyse how the government and the central bank tackle the situation with policy prescriptions. In the report, students are required to answer all the questions as given below. Remember this is not about providing the right answer this is about providing a good answer that is supported by an identified theoretical framework.

Current Economic Scenario in Australia

Summary of the statement released by the RBA governor Philip Lowe on the 4th of February 2020:   

Interest rates are very low around the world and a number of central banks eased monetary policy over the second half of 2019. There is an expectation of a little further monetary easing in some economies. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is around its lowest level over recent times.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.

The unemployment rate declined in December to 5.1 per cent. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet.

Inflation remains low and stable. Over 2019, CPI inflation was 1.8 per cent and underlying inflation was a little lower than this

There are continuing signs of a pick-up in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.

The Board decided to leave the cash rate unchanged at 0.75 per cent on 4th Feb (following the same rate in the last four quarters), which has been reduced by further 25 basis points in the 3rd of March 2020. In fact, the cash rates and interest rates has been historically low since last 5 years in Australia. What are the determinants of interest rates in general? Why the cash rate and interest rate are historically low in Australia in the last 5 years? What are the domestic economic conditions that has led to such low interest rate? What are the impacts of international economic conditions on RBA’s decision to lower the interest rates?

ECO201 Foundations of Economics

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Macroeconomic Business Production

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