1. While the domestic factors play an overwhelmingly vital role in determining the cash rate in the economy, the external factors too have a big impact in the eventual decision. Currently, there are a number of global trends that could determine the cash rate by the Reserve Bank of Australia. First, the global currency trends is an influential tool and at the moment plays an exceptionally primary role. The performance of the Australian Dollar is basically pegged on the performance of other global currencies such as the US Dollar, the British Sterling Pound and the Euro. With the Australian dollar hitting as low as 75 dollars against 1 USD according to Trading Economics (2017), means that it is important that the cash rate is slashed.
The overseas housing market is another important instrument for determining the cash rate in Australia by the Reserve Bank. Prices in the housing market are compared with other countries such as the United States, Canada, The United Kingdom and other European countries. Generally, the soaring prices of the housing market in Australia means that the property market is facing a stumbling block to ensure affordability of the same is realized (Jericho & Farrer 2016). Investments can be increased by ensuring that affordability is realized in the short run. Thirdly, consumer demand for goods in the international market is another external factor that is in play. However, this is mainly influenced by the performance of the Australian Dollar in comparison to others. As aforementioned a dismal performance of the Aussie dollar is testament that its exports face a huge problem in the international market; low sales.
2. All the external conditions highlighted as influential in the determination of the cash rate by the Reserve Bank of Australia have a huge impact on the Aggregate Demand. First, Consumption levels or rather consumer demand affects the aggregate demand as indicated by its close association with the Foreign exchange rate involving the Australian Dollar and the other powerful global currencies in the world. Low consumer demand means that the Aggregate demand is falling. Consumer spending reduces sharply because they are not attracted by the available goods and services which is particularly as a result of lower levels of disposable income available. For an increase in the consumption levels, consumers should be able to spend their income on the available goods and services as indicated by the diagram below.
Dismally performing Australian Dollar in comparison to the USD implies that the Australian products are not valuable in the international market. In other words, the country will suffer from cheap exports while paying expensively for its imports. The result is that there will be unfavorable balance of trade.
However, in the first instance, a lower dollar performance in respect to the dollar implies consumers are not able to spend more on the available goods and services (Canstar Research 2016). This leads to a decrease in the aggregate demand. More so, cheap imports also means that the aggregate demand is as well decimated. Lastly, inflationary tendencies in the Australian housing market is also testament that consumers have more to spend. Inflation gives consumers a lot of money which then creates demand for goods in the economy leading to an increase in the aggregate demand as indicated by the movement from AD to AD1 in which the price changes from P to P1 as an increase equilibrium price increases from E TO E1..
Jericho, G., & Farrer, M. 2016. Reserve Bank of Australia: RBA cuts the cash rate to all-time low of 1.5% – as it happened, The Guardian. Retrieved from: https://www.theguardian.com/business/blog/live/2016/aug/02/reserve-bank-of-australia-rba-meets-to-decide-on-cash-rate-live
Canstar Research, 2016. RBA interest rate – Deciding factors. Retrieved from: https://www.canstar.com.au/home-loans/cash-rate-considerations/
Trading Economics, 2017. Australia Indicators Oecd Data: Australia. Retrieved from: https://tradingeconomics.com/australia/indicators%20oecd%20data:%20australia:%20https:/data.oecd.org/australia.html