Macroeconomic Objectives And Monetary Policy In Australia Essay.

Question 1: List and explain the key macroeconomic goals and provide an overview of the Australian economy

This assessment task requires you to write an essay that demonstrates your theoretical and applied knowledge relating to the macro economy and monetary policy. It focuses on the macroeconomic section of the unit and builds on the economic fundamentals that you learnt in the first half of the term. You will need a sound understanding of the GDP, economic growth, business cycle, unemployment, inflation, and macroeconomic stabilisation monetary policy. In this essay, you will refer to the chapters outlined in the prescribed text book, relevant journal articles, and relevant reports of the Australian government websites including the Reserve Bank of Australia (RBA). The purpose of this assessment is to develop skills in interpreting current macroeconomic indicators, analysing RBA functions and role of monetary policy management, its strengths, weaknesses and its implications on consumption, investment, government expenditure, housing market and the wider economy.

Discuss the current macroeconomic environment in Australia, and critically discuss the use of Monetary Policy as a stabilising tool by the Reserve Bank of Australia.

Task Description: In this task, you will write an essay dealing with macro-economic objectives, functions of RBA and on role of monetary policy based on the RBA decision 6th August 2019, provided along with the link. Guiding questions, will help you structure your response. Do not forget to apply the DADA framework, using data and graphs to support your response. A marking rubric is posted on the Moodle site, which can help you understand what is required to reach your desired level of achievement.

The body of the essay contains the main sections. Please divide the body section into sub-sections by including sub-headings as suggested below from Q1 to Q5.

However, your arguments and diagrams should be organised in a logical and coherent manner.

Question 1: List and explain the key macro-economic goals, and provide an overview of the Australian economy? Discuss with tables and graphs the main macroeconomic indicators for the Australian economy. (i) conduct research on the current trend in economic growth, GDP, inflation rate, unemployment rate, exchange rate, government debt and other macroeconomic indicators using multiple sources. (ii) Identify the stage of business cycle based on the current Australian macro-economic indicators.

Question 2: Explain the main objectives of the monetary policy. List and describe the main functions of the Reserve Bank of Australia. Discuss the limitations of the monetary policy to stabilise the economy.

Question 3: On 6-August-2019, the Governor of the RBA, Dr Philip Lowe, decided to leave the official cash rate unchanged at 1 percent as house prices continue to fall. Explain why the Reserve Bank of Australia kept the official cash rate unchanged from August 2016 to 1.5% until May 2019. It was revised in June to 1.25% and July 2019, when official cash rate was dropped to 1%? Justify your answer with reasons and evidence. Note: Information is available in the monthly minutes of RBA. https://www.rba.gov.au/monetary-policy/rba-board- minutes/2019/

Question 4: Illustrate and explain the expansionary and contractionary monetary policy graphs as to how an increase in the cash rate from 1 % to 1.5% would help to keep inflation within the target rate, and how a further decrease from 1% to 0.75 % in the cash rate would help to stimulate the economy. Describe the circumstances in which the RBA Board might decrease and/or increase the cash rate in the future.

Question 5: Define economic growth. What are the determinants of long-run economic growth? Is the historically low interest rate of 1.50 % (from August 2016 until May 2019) to 1 % percent until the August 2019) sustainable to achieve long-run economic growth? Discuss the effect of low interest rate on household consumption, business investment, inflation and housing market. Note: Use GDP, inflation, unemployment, fiscal deficit, and housing market data, which can be obtained from the Australian Bureau of Statistics and RBA websites for the last 5 years to see the trends, when answering this question.

Question 1: List and explain the key macroeconomic goals and provide an overview of the Australian economy

Macroeconomics is unit of economics which focuses on behavior and enactment of an economy. It is based on the aggregate fluctuations in the economy such as growth rate, unemployment and inflation. Most governments and organizations use macroeconomic simulations to enable them formulate economic strategies and guidelines.

Australia has a very sturdy economy that has experienced many highs and lows in past years. It therefore entails in western market whereby the gross domestic product is high and poverty rate is too low. Australia has a free market which is on top of five developed countries in the world. The Australian economy is subjugated by services sectors even though agriculture and mining sector have higher percentage on the state exports. Macroeconomics is widely explained in broad as it is evident below.

Macroeconomic goals are very important. The goals include; full employment, stability and economic growth. Employment is achieved when resources are utilized to produce goods and services ( Akerlof, Dickens, & Perry, 2016). All resources in a certain economy are very of great important. Thus the economy gets profits from full employment since these resources produces the goods that fulfill the needs that reduce the shortage problem. If the assets are not engaged, then little production and satisfaction is achieved.             

Stability is realized through evading fluctuations in production, prices and employment. Stability seeks to evade inflationary expansions of economic cycles. This target is shown by month to month or annual; to annual changes in different economic agencies like inflation rate .and growth level of a certain production (Weale & Blake, 2015). Maintenance of stability is very much important because it shows that uncertainty and economic disturbances are evaded (Ashraf, Gershman, & Howitt, 2016). Therefore this narrows down that the customer and companies can safely chase those long-term depletion and production strategies.

Economic growth is another key goal for macroeconomics achieved by snowballing the economy’s power to produces possessions and services. This kind of a goal is shown through getting the measurements of the growth rate of invention. Once an economy produces more goods compared to those of last time, then the business is said to be growing. An economic growth is marked by the increase in the quantities of resources which are recycled to produce a lot of goods (Assenza,, Bao, Hommes, & Massaro, 2014). Due to economic impact on growth, a community acquires those goods needed to satisfy more needs to the people thus improving the living standards and making scarcity reduce.

Question 2: Explain the main objectives of the monetary policy, list and describe the main functions of the Reserve Bank of Australia, and discuss the limitations of the monetary policy to stabilise the economy

Australian economic indicators enable investors and experts access asset chances and opportunities as whole. This varies from gross domestic products to consumer price indices as there are multiple of data point that can aid global stakeholders to predict the variations in a country’s economic and enable them adjust their ranges (Cross & Poon, 2016).This is well evident when international investor from Australia has spawned health returns over the previous years from Chinese equities. An investor who the trails consumer price index may realize that there is rise in inflation, which indicates that the central bank may plan to hike their interest rates which results in affecting the equities. There are economic indicators in which the investors should follow:

GDP represents the marketplace price of all end product of goods and services produced within a nation during a certain period of time.  The figure is produced in real format with GDPs modifying changes in monetary rate.  When a country expands or grows, then the GDP is revealing of a growing economy whereas when the GDP goes down then it alarms that there is slowdown of a nation economy (Weller & O’Neill, 2014). A country’s GDP growth rate can be casted off to help in determining a country’s debt single out whether a company situated in a certain country will have to grow.

The rate of productivity and wealth of a nation’s citizens is the determiner of economic achievement. These employment indicators comprising of payrolls, labor force and unemployment data tries to guesstimate the number of citizens under employment regardless of whether making profits or incurring losses. The financial markets watch on these employment indicators more so in those developing countries which create income from consumers. When a country experiences a reduction in the rate of employment, then there is a fall in consumer expenditure and hurts the GDP evaluations and the economic growth prospects.

This measures those variations on prices of substances and services obtained by a family. The price index is an arithmetical estimate developed by using those prices from a sample items collected occasionally. This financial markets look into CPI figures for signs of inflation. This is realized where a rising inflation results to very high interest rates and reduces lending, whereas devaluation lead  to low interest rates and higher lending.

In Australia, central banks generate monetary policy and apply significant control over a country’s economy. Many financial markets heed carefully to every word that the central bank to the public so as to get clue to what might occur in the near future.

Question 3: Analyze the RBA decision on the official cash rate from August 2016 to August 2019

Business cycle is also called economic cycle referring to an economic variations in trade, production and economic activity. Business cycle is the rising and falling movement of levels of GDP and thus it refers to the period of developments and reductions in financial activities.

An expansion is followed by high rate of employment, upward pressure on prices and economic growth. A peak being the highest plug of business cycle ,it is when a business is producing at maximum  output at this phase, there is full employment and inflationary pressures on prices . An economy then goes to another stage of contraction where growth rates slows down, employment begins to decline and the prices of commodities subsides. The slowing down then ceases to enter another phase of trough and in this stage the economy is flat at the bottom in which the next phase of rising and reduction will emerge.

Neutrality of Money

Many economists are the advocates of neutral money. They give opinions that monetary power should purpose to neutrality of money in a certain economy. According to most neutralists, monetary variation brings about disturbances in operation of the economic system of a state. Money is kept by this monetary power ( Akerlof, Dickens, & Perry, 2016). This means during advertisements the sums of money should be stable thus it should affect or influence consumption and also the rate of production of an economy.

Exchange Stability

The system corrects disequilibrium in terms of balance on payments and exchange of stability will be maintained. And if there is instability in exchange a rate, it results to drainage or incursion of gold in balance of payments. Therefore it is clear that the key objective of monetary program is to uphold stability in the exterior balance of the country.  Thus those forces which bring about instability in interchange charges are eliminated.

Price Stability

This promotes business plan and ensures equal distribution of wealth and income. It also hinders economic advancement since there is no motivation which may lead to high production of quality goods in a community. Price stability discourages selling but supports buying of goods and services.  Therefore, a slight increase in value level delivers a boost on economic growth thus keeping quality of a stable price.

This is where per capita income of a nation upsurges over long retro of time. Monetary policy encourages unrelenting and incessant economic growth by preserving stability between total demand of money to total production capacity and later resulting to favorable conditions for investments and hoards.

Question 4: Illustrate and explain the expansionary and contractionary monetary policy graphs and describe the circumstances in which the RBA Board might decrease and/or increase the cash rate in the future

(i)Monitory policy

It conducts monetary policy to achieve its targets on full employment, price stability and economic prosperity and the welfare of Australian people.

(ii) Responsible for procedures in financial markets

It also operates in domestic and intercontinental markets, in order to certify proper working of payments and achieve foreign exchange of Australia (Cross & Poon, 2016).

(iii) Financial stability

Reserve bank of Australia is accountable for economic scheme stability (Weller & O’Neill, 2014. This is achieved through providing fluidness to institutions and cooperation with other firms.

(iv)Issuing of banknotes

It also responsible for production and issuing of banknotes that every citizen can trust as means of recompense and as a stockpile of price.  

(v)Expenditures and financial arcades infrastructure

The Reserve Bank ensures the firmness, efficiency and attractiveness of the payment system.

Limitations of Monetary Policy

It is not useful during global recessions.

If the banks lower interest rates for end users to use more money during a global collapse, the trade sector will suffer (Rogers, Scotti, & Wright, 2014). This shows that the export losses would be much more compared to what commercial organizations could earn from the deals.

It does not guarantee budget retrieval

Economists who do not support Federal Reserve on introducing these policies argue that, not all the consumers have self-assurance to spend and take benefit of low interest charges.

It discourages expansion of businesses

Interest charges increase allowing businesses to expand their tasks, causing less production and higher prices. The customers then will lack enough capital to purchase goods and services and thus organizations will take long period to recover and even some consumers will need to close their shops.

Interest rates can increase and this makes a lot of businesses not to enlarge their processes leading to less production and eventually higher prices  (Rogers, Scotti, & Wright, 2014). This is because the consumer would not have an access to goods and services and this would take a business a long time to recover.

The cash rate is dogged I the money market due to demand and supply of immediate capitals. The Reserve Bank of Australia holds these funds since they are settlement funds. Cash rate remained unchanged since when more settlement funds are supplied than what commercial bank plan to hold, then the banks shed funds by lending more in the cash market which later will result to cash rate fall (Law & Singh, 2014).

Question 5: Define economic growth, discuss its determinants and effects, and critically evaluate the historically low interest rate in Australia

Cash rate is the rate introduced on intermediate loans between financial intermediaries. If the Reserve Banks supplies less than all other banks wish to grasp, they give a feedback by borrowing more to enable them build up their grasps of exchange funds and in the process the cash rate will be increased. Cash rate will be reduced if the Reserve Bank has supplied more than all other banks, the banks shed funds by lending more to help control the cash flow (Gorgenson, Gollop, & Fraumeni, 2016).

Inflation must be held at all times since it allows for unavoidable circumstances that are evident in predicting, and pauses the effect of monetary policy on the economy.  When the demand is weak inflationary pressures are probably to be fading and monetary policy can be relieved (Panayotou, 2016).

It is an increase in the manufacture of goods and services from a period of time to another. It is measured by the increase in country’s output (GDP). It is the total value of all last goods and services manufactured within a country over a certain period (Kahn, 2019).

Determinants of long-run growth

Growth of Productivity

It is the ratio of productions to contributions. Thus when the productivity rises the price of goods is dropped  (Rogers, Scotti, & Wright, 2014). Lower prices leads to increase the demand for the product or service.

Demographic Changes

Demographic changes affect economic growth by shifting the employment to population proportion. The changes include quality and number of natural capitals (Cai, 2016).

Labor Force Participation

The number of workers available in an organization inhibits the amount of work done after a certain period of time and thus labor has an influence on economic growth.

When interest rates are lowered, the banks then can borrow huge money for less interest and so it will improve the economic growth of a country (Wu & Xia, 2016). Also lowering interest rates makes individuals borrow since the loans becomes attractive and reasonable. The more the consumer uses the money the more the economy grows. At low interest rates consumers invest more and so they make a lot of profits for their stock since credit becomes much expensive with higher interest rate (Swanson & Williams, 2014).

Conclusion

Macroeconomics is based on the aggregate fluctuations in the economy including growth rate, unemployment and inflation. Economy gets profits from full employment since these resources produces the goods that fulfill the needs that reduce the shortage problem. The above points explain more on macroeconomics research study.

References

Akerlof, G. A., Dickens, W. T., & Perry, G. L. (2016). The macroeconomics of low inflation. Brookings papers on economic activity, 71-78.

Ashraf, Q., Gershman, B., & Howitt, P. (2016). How inflation affects macroeconomic performance: an agent-based computational investigation. Macroeconomic dynamics, 558-581.

Assenza,, T., Bao, T., Hommes, C., & Massaro, D. (2014). Experiments on expectations in macroeconomics and finance. In Experiments in macroeconomics, 5(2), 20-34.

Cai, J. (2016). The impact of insurance provision on household production and financial decisions. American Economic Journal: Economic Policy, 8(2), 44-88.

Cross, J., & Poon, A. (2016). Forecasting structural change and fat-tailed events in Australian macroeconomic variables. Economic Modelling, 7(3), 32-45.

Gorgenson, D., Gollop, F. M., & Fraumeni, B. (2016). Productivity and US economic growth (Vol. 169). London: Elsevier.

Kahn, H. (2019). World economic development: 1979 and beyond. London: Routledge.

Law, S. H., & Singh, H. (2014). Does too much finance harm economic growth? Journal of Banking & Finance, 41, 36-44.

Malmendier, U., & Nagel, S. (2016). Learning from inflation experiences. The Quarterly Journal of Economics, 78-84.

Panayotou, T. (2016). Economic growth and the environment. The environment in anthropology, 140-148.

Rogers, H., Scotti, C., & Wright, J. H. (2014). Evaluating asset-market effects of unconventional monetary policy: a multi-country review. Economic Policy, 5(1), 45-62.

Sims, C. A. (2016). Macroeconomics and reality. journal of the Econometric Society, 57-61.

Swanson, E. T., & Williams, J. C. (2014). Measuring the effect of the zero lower bound on medium-and longer-term interest rates. American Economic Review, 104(10), 3154-85.

Weale, M., & Blake, A. (2015). Macroeconomic policy. Inflation, wealth and the exchange rate. Routledge., 67-72.

Weller, S., & O’Neill, P. (2014). De-industrialisation, financialisation and Australia’s macro-economic trap. Cambridge Journal of Regions, Economy and Society,, 8(5), 50-67.

Wu, J. C., & Xia, F. D. (2016). Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking, 48(2-3),, 253-291.