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- Discuss the economy of Australia.
- Define Macro- economic goals.
The economic indicators in an economy mainly consist of a variety of factors such as the GDP growth in an economy, the inflation or deflation rate, the monetary or fiscal policies etc. the Australian economy has regularly been growing where they have registered an uninterrupted growth of 26 years (Loukoianova, Wong & Hussiada, 2019). In the current report, the major economic goals and the economic position of Australia will be discussed where the different factors have been evaluated and trends have ben analysed. Further, in the report, the major objectives of the monetary policy have been discussed and what are the major function of the RBA will also be evaluated and discussed. In the following section of the report, the measures adopted by the economy to stabilize it will be discussed and the concept of expansionary or Contractionary monetary policies will also be discussed. Lastly, this report will evaluate the concept of economic growth in the long run and the impact of interest rates on different economic indicators will be discussed and analysed accordingly.
Key Macro- economic goals and economy of Australia.
On a macro economical basis, every economy tends to achieve three major goals for their economy i.e. economic growth, stability of the growth and the maximum employment levels. Currently, the Australian Economy can be termed as a successful or a thriving economy and it has been regularly growing (Parsons, Weir & Farrar, 2019). The economy has marked the longest period of uninterrupted growth covering 26 years and continued to rise even during the period of global recession becoming the 13th largest economy.
In the year 2018, the growth of the GDP of Australian Economy was recorded to be 3.2%. The major drivers of the economy were recorded to be business and government spendings and the consumer sector also grew amongst the low wage growth rate. The export of the economy in the agricultural sector at a vast scale and the strong financial sector were also major contributors of the economy in its GDP growth. It is estimated that for the year 2019, the GDP of the Australian Economy has reached AUD$ 1.89 trillion and is further expected to grow by 2.7% in 2020 (Australia Economy – overview, 2020).
The inflation rate of the Australian economy was 2.2% approximately in the year 2018 and it is further expected to have reached at 2% in year 2019 and for the year 2020, it is expected to be 2.5% (IMF- World Economic Outlook Reports, 20200. This shows that the inflation level are continuously increasing and the only reason it is expected to increase is because the mining sector is expected to end and the cash rate has been falling steadily. However, despite this the inflation has continuously been in the range of 2 to 3% and this is a comparatively much lower rate. Get Assignment Examples.Talk to our Experts!
The estimates of the Australian Bureau of Statistics show that in the year 2019, unemployment rate was found to have increased by 0.1% and became 5.3% whereas the labour participation rate was found to have decreased by 0.1% becoming 66% (Cross, Hou & Poon, 2018). The rate is comparatively much lower and approximately only 725000 Australian are unemployed and this rat is also expected to decline rigorously. However, the underemployment rate i.e. the rate of people who want more employment is continuously rising and there are approximately 1.1 million people who are underemployed today i.e. their employment is not adequate (The economic context of Australia, 2020). Additionally, the future holds an ageing population for the Australian economy.
The mining industry is still the major contributors for GDP growth where the iron ore exports alone are responsible for 24% of the annual exports of the economy. There are wide reserves such as uranium, gold etc. and the extraction of these resources are also major economic growth contributors.
The Australian Dollar has improved immensely in the year 2019 along with the ASX and it is expected to further increase by 0.70 cents in 2020 (OECD Countries, 2020). The performance of Australia has always been heavily influenced by the performance of Chinese and US economy. However, the external debt of the economy was $1 trillion in 2017 due to the structural deficits in current account of Australia but since then, the deficits have narrowed down majorly due to return of Australian government debt and net federal debt which was estimate at $326 billion. The public debt of the Australian economy was found to be 41.1% of the GDP and current account deficit is expected to become -45.61 in 2020 (The economic context of Australia, 2020).
Main Objectives of Monetary Policy
The monetary policy of an economy covers the policies that are set up by the central bank related to the amount of credit or money flow in an economy (Cross, 2019). The monetary policies are major contributors in the development or movement of an economy and help in deciding which are the factors or sectors that are to be promoted. Overall, the major objective of the monetary policies is to control the interest rates by the manner of controlling the cash reserve ratio and the statutory liquidity ratio developed by the reserve bank of a country. This further helps in promoting or increasing the employment rates in the economy and further lays emphasis on the stable pricing rates in the economy. This helps in effectively controlling the monetary policies and their impact on the economic growth and employment level.
In the Australian economy, the Reserve Bank of Australia is the major monetary policy regulator and develops or decides on all the rates that are to be prevalent in the economy. The role of bank is not just limited to development of monetary policies and issuing the bank notes etc., it further extends to ensuring that the currency of Australia remains stable, the employment level is maximum and the economic prosperity of Australian economy continues to rise. The RBA has always focused on keeping the inflation rate between the average ratio of 2 to 3 percent and this has been achieved in Australia by maintaining the cash rate and other interest and bank associated rates (Robust Economy, 2020). The operations of RBI further extend to forecasting the future trends related to economic growth and the adjustments that are to be made in the monetary policies are also ascertained. When the adjustment to be made in the cash rate is decided by RBI, for instance, when the Global financial crisis was at its peak, RMA decided to decrease the cash rate so that the interest rates could increase and the rising inflation problem could be addressed. This increase in interest rates leads to controlling the inflation rate within the range of 2-3% (OECD Countries, 2020). The cash rate is the main tool whereby influencing the supply of money in the money market, RBA is able to affect the interest rate as well. When the supply of money decreases, the RBA buys the treasury notes thus increasing money supply in the market and the cash rate also declines. Therefore, the interest rate is affected by the cash rate changes accordingly. Order assignment help from our experts!
The monetary policy alone, is not an adequate tool for managing the economic stability and growth. The open market operations, discount rate and the reserve requirement or management are three key areas through which monetary policy tends to control the environment. However, there are many limitations that are inherent in the exercising of these three tools (Callander, E. J & et.al., (2019). The economy is very uncertain and its reaction to the increase or decrease in the money supply policies that have been developed for the economy is very uncertain. When the money supply is manipulated, there are a variety of sectors that get affected and rather than the intended objective of stabilizing the economy, there are chances that the lack of any control or prediction regarding the household deposits etc. are the key points that might not stabilize the environment adequately. Therefore, although the aim is to bring stabilization in economy yet, it might at times rather bring disruption than the stabilization.
Explanation of the official cash rate.
During the entire period from August 2016 to May 2019, the RBA kept the cash rate at a constant rate of 1.5%. the major reason behind keeping such lower interest rates were the fact that the global economic growth had come to the point of standstill (IMF- World Economic Outlook Reports, 2020). The rate was not shifted or changed because of the rising unemployment rate and in order to keep inflation rate in check within the belt of 2 to 3%.
In order to keep the inflation rate consistent, the RBA recognized that the labour market of the economy needed to be Improved and the economy still had the potential to improve further. The government recognized that the employment is growing in the economy steadily and the wage growth is also expected to be strong due to this growth in employment rate (Cusbert, T., & Kendall, E. (2019). This led to the development of speculation that the employment rate will remain steady over the years and therefore overall economic development was also expected to remain steady. The RBA gave a clear indication that it will modify the cash rates as and when the labour market refuses to show any potential growth. The expectation that the inflation would not return to its designated state until they year 2021 was another key reason for keeping the cash rate steady for a period of 30 months straight.
In the meeting held on the 3rd December 2019; it was decided to keep the cash rate unchanged and the lower interest rates all around the world along with the ease in credit availing policies depicted that the global economy was at a riskier scale and in order to minimize the intended risks, the Australian government decided to keep the interest rates lower and therefore minimize the cash rates as well (DominguezTorres, H., & Hierro, L. A. (2019). The unemployment rate was found to be at a steady level of 5.25% in the past years and the expectation that this level would remain constant for a certain time until the year 2021 when it was expected to decline was another factor that led to the governor deciding that the cash rate needs to remain constant (Reserve Bank of Australia, 2019). This constant state of unemployment has also affected the growth rates of the wage, and they are also expected to remain constant for a coming period. Additionally, the target of maintaining the inflation rate sustainably so that it does not affect the growth of the economy and helps it in meeting the critical situation of the global economy in an effective manner, the economy tends to be protected particularly in the context of cash supply rates. Struggling with your dissertation, get our dissertation editing services at best prices.
Collectively, the monetary policy was eased and this helped the economy in supporting the employment rates and also led to wage growth i.e. improvement in the income of the people of Australia. When the cash rate was kept at a constant low of 15, the exchange rate of the economy was also pressured in a downward direction and thus the range of activities were supported all over the world (Reserve Bank of Australia, 2019). This constant cash rate has also led to a boost in the prices of the assets thus leading to an increased consumer spending particularly on the residential property sector. Therefore, the lower interest rates and the mortgage rates have led to an increase in the disposable income that is available with the consumers thus boosting the sector of household spending. This boost will be the major factor in improving the economic conditions and therefore the steady cash rate was expected to keep the economy running on a stable path thus improving the economical growth.
Expansionary and Contractionary monetary policy.485
The monetary policies can be implemented in a double faced manner where they can either increase the money supply in the market or decrease it thus leading to expansion or contraction.
The expansionary monetary policy involves the use of tools by the central bank that will help in increasing the money supply i.e. in stimulating the entire economy. The interest rates are lowered and the aggregate demand increases thus boosting the GDP of the economy. Usually, after the economy has faced the situation of recession, the expansionary policy is used in the economy so as to return the economy at the equilibrium or normal state (Hossain, 2019). When the Australian Governor will decrease the cash rate from 1% to 0.75%, the interest rates charged by the commercial banks will also decline and this will increase the spending power of the people in the economy. When the interest rates will fall and people will have more money to spend due to increased money supply, the value of the currency will lower and the exchange rate will also decline thus leading to a increased spending (Cai, 2018). This ensures that the inflation level is maintained in the economy and the economy is growing. This makes the inflation level of an economy increase but in order to avoid the situation of hyperinflation where increased spending power forces people to hoard onto the things, the Contractionary monetary policy comes into action.
Under the Contractionary monetary policy or the restrictive policy, the opposite happens i.e. the cash rate is increased by RBA and thus the interest rates get affected as well. In the current scenario, when the cash rate will be increased from 1% to 1.5%, this will automatically lead to rise in the interest rates as well thus making the borrowing expensive (The economic context of Australia, 2020). This increase in interest rate will lead to a reduction in the money supply and the people will have less amount to spend. Ultimately, this contraction or restriction will lead to a reduction in the inflation rate because when people will have less money to spend, the buying or spending of the consumers will also decline. However, when the Contractionary policy is exercised the unemployment rates automatically increases because the supply of money decreases and therefore the wage rates also decline (Blanchard & et.al., 2019). But the Australian governor of RBA has tried to control that measure because the increase in the cash rate cannot be avoided if the sustainable growth has to be promoted in the economy.
In future as well, in order to enhance the price stability and also the economic prosperity of the nation, it is necessary to exercise control on the cash rates because the RBA cannot control the interest rate that is charged by the banks and therefore in order to control inflation and the economy, central bank can influence or exercise the Contractionary or expansionary policies regarding cash rate.
Economic Growth and determinants in long run.
The term economic growth can be defined as the increase or decrease in the production of goods and services on the basis of per head over a time period. There are various determinants of the economic growth in the long run such as the production levels in the economy, contribution of the labour force, and the demographic changes (Kartashova, & Zhou, X. 2019). The movement of money supply i.e. increase in the money supply must be consistent with the economic growth and this ensures that the economy grows collectively.
When the interest rates were reduced by the RBA to 0.75% in the year 2019, it symbolized that the cash rates had also declined. Collectively this decline led to increase in money supply, and the chances of inflation get reduced (Robust Economy, 2020). When the inflation is controlled in thus manner, it ensures that there is a balanced growth in the economy this leading to a balanced growth of money supply as well and therefore the economic growth can be achieved. The decrease in interest rates also signifies that the contribution of the labour force will increase because employment rates tend to increase and collectively all these factors point towards a sustainable economic growth in the economy.
When the interest rates in the economy decline, the economy leads to a collective boost in the growth and the economy prospers. When the interest rates are reduced, the consumption level in an economy increases because the consumers have higher level of disposable income thus making them spend more. Similarly, the cost of borrowing also declines and the business institution are influenced to increase their borrowings and ultimately their investment levels. The exchange rate also declines leading to the increased competitiveness in the export level thus improving the balance of current account as well (Li, 2019). The inflation rates however increase because the spending power of the people rises thus increasing inflation rate. The lower interest rates also lead to a lower mortgage rate and this motivates people to but more houses because they are able to take loans at a lower interest rate.
Conclusion
The research conducted in the report above helps in concluding that the economy of Australia is dependent on a variety of factors and it has regularly been growing. The research helped in identifying that the Australian economy is the only country amongst the OECD countries that have showed an uninterrupted growth. The report also helped in concluding that GDP is continuously rising and the different factors such as inflation have been in control. The report also helped in identifying that how the RBA develops their monetary policies and whether the decision of keeping the cash rate stable for a period of 30 months was a wise decision or not. Further, it was identified that the increase or decrease in the cash rates is largely dependent on the inflation level that is prevalent in the economy and the concept of expansionary and contractionary monetary policy was discussed. Finally, the report identified that are three major determinants of the economic growth in the long run and these are production, labour force contribution and demographic changes. The impact of interest rates on the different factors associated with economic growth was identified and discussed ac
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