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Macroeconomics Policies And Their Effect On Australian Economy

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Questions:

Question 1

Using current economic data and analysing a number of leading, lagging and coincident indicators, determine Australia’s position on the business cycle. Justify you answer, including any relevant diagrams.
                                                                                                               
Question 2

a.) Which monetary policy is more effective in moderating the business cycle, tight or easy?  Give reasons for your answers.
b.) What is the current monetary policy stance of the RBA? What factors do the RBA take into consideration, before a decision is made as to whether to implement a tight or easy monetary policy?
c.) Using AD-AS model, explain how interest rates affect the key macroeconomic variables.
                                                                                               
Question 3

a.) Comment on the recent factors that are affecting the value of the Australian dollar. Use diagrams to illustrate your answer.
b.) Who gains and who loses when the Australian dollar depreciates? Justify your answer.
c.) In your opinion, is a depreciating $A good or bad for the Australian economy? Justify your answer.
 
 

Answers:

1. Business cycle refers to as a upward and downward movement of the gross domestic product (GDP) of the country. It is also known as the fluctuation in the economic activities within a period of time of a nation. It is usually measured for conducting the growth rate of real GDP. Business cycle is mainly describes as four phases that is prosperity, recession, depression, recovery (Hunkeler, 2000).

  • GDP growth of Australia:

The trend in GDP growth rates and the inflation rate of Australia are shown by the following diagram. In the GDP growth rate they commonly used the measurement of the economic growth. GDP can be calculated by the annual basis and it is the monetary value of all the finished goods and services. The annual growth rate of Australia for the e=year of 2013 was 1.8%, the GDP growth of Australia for the year 1992 to 2014 is shown.

(Luo, 2009)

  • Balance of payment:

In measuring the economic balance the international trade follows a significant role. BOP represents that the current condition of a country.  Balanced of payment is necessary to be achieved. The current balanced of Australia are shown in the diagram (Alawattage, 2009).

  • Inflation:

Inflation means the rise in price  it is necessary to see the overall increase in the general price index we should necessary to check the inflation rate. In the diagram the measurement of inflation are shown in terms of consumer price index of Australia (Bekaert and Wang, 2010).

The diagram indicate the global business cycle, we can see that Australia is in expansionary phase.

2. A. Monetary policy plays a important role in maintain the quality of money circulating in the economy, for altering the inflation and unemployment scenario in the economy , this trends help to moderate the business cycle , to moderate the business cycle government taken the effectiveness of the monetary policy (Pedram, 2011). An expansionary monetary policy also known as the easy monetary policy, to increase and decrease the money supply in the rate of interest. It is implemented during the recession phase of business cycle. During the inflation contractionary monetary policy is implemented.

B. The RBA is responsible for the Australia monetary policy. It involves setting the interest rate on overnight loans in the money market. The current position of Australian economy can be characterized by the moderate growth rate and decline in the investment spending. The reserve bank of Australia implemented a several monetary policies in the economy, it is accommodating in nature, and the target rate set by RBA is 2.5%. Thus RBI increases the demand to promote the growth of economy.

C. The AD-AS model means the aggregate demand and aggregate supply. The  output is X-axis and Y-axis which measured the national output and the price level. Due to change in the rate of interest it is also known as the aggregate demand.  An increase in the rate of interest would be on left side of the AD curve and fall would be lead to the rightward side of the curve. On the contrary a shift of the AD curve to the right causes the inflation rate as well as national output to increased.

3. a. The factors that influence the Australian dollar value are the growth rate of the economy, inflation rate, etc (Inducible mouse model for Alzheimer's disease (AD), 2013) , the following diagram shows the change that occur in the exchange rate market.

In this diagram, the demand curve shifts upward due to the increase in Australian dollar and also increase in the equilibrium quality. The demand curve shift downward due to the decreased in Australian dollar and also fall in the equilibrium quality.

This diagram shows the supply exchange rate quality. In this the supply increases and equilibrium quality also increase and supply decreased the equilibrium quality also decreased.

b. The value of the currency of country falls when there is the depreciation an increase in exchange rate above the equilibrium level.  This benefited to the home country while export and import become expensive. Thus the country who imported from the home country will lose and exported will be gain.

c. If there is depreciation in Australian economy the rate of exchange would be increase and the currency would be falls. This means Australian received more money when they exports and automatically it will increased the exchange rate. On the other hand, Australian imports become expensive as now Australia has to pay more for the same commodity when they purchased the exchange rate depreciation. Now depreciation occur when the increase in exchange rate  and then export increase and import falls.

 

References

Alawattage, U. (2009). Exchange Rate, Competitiveness and Balance of Payment Performance. Staff Studies, 35(1).

Bekaert, G. and Wang, X. (2010). Inflation risk and the inflation risk premium. Economic Policy, 25(64), pp.755-806.

Hunkeler, D. (2000). Life cycle profit optimization a business opportunity. The International Journal of Life Cycle Assessment, 5(1), pp.59-62.

Inducible mouse model for Alzheimer's disease (AD). (2013). Science-Business eXchange, 6(9).

Luo, L. (2009). Forecasting Growth of Australian Industrial Output Using Interest Rate Models. International Business Research, 1(2).

Pedram, M. (2011). Optimal monetary policy in the monetary union: effects on business cycles. OPEC Energy Review, 35(1), pp.90-117.

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