Reference no: EM132385342 , Length: word count : 3000

Assignment Overview

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.

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.

Assessment Topic

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.

Suggested structure and guiding questions for the essay

1. Introduction

The Introductory paragraph(s) should broadly explain the importance of the topic that will be discussed, and a brief outline of the main sections of the essay.

2. Body of the Essay (provide headings and subheadings)

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.

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? Yes/No, justify your answer with reasons- use several references. 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.

3. Conclusion

Conclusion should be an integrated summary of your main points. It should include a final statement that reflects the research you conducted and your overall understanding of the topic. New material should not be introduced into the concluding section.

4. Reference list

All references should follow the APA style and reference list should include all the references that you have cited in an alphabetical order.

Background Information: RBA Monetary Policy

The RBA board meets 11 times a year (not in January) at the RBA in Martin Place, Sydney. Prior to the meeting, board members are provided with analysis of the economy and the financial markets by the RBA staff (prepared by the Economic Analysis Department). Among these analyses are the bank's forecasts of future inflation, as well as the likely future path of economic growth overseas and domestically. RBA monetary policy decisions are based on these analyses as well as a range of other macroeconomic assumptions. In addition, scenarios are provided as to the likely macroeconomic outcomes if monetary policy was adjusted.

The RBA meeting occurs on the first Tuesday of each month. After much discussion, a consensus decision is reached as to whether to leave interest rate unchanged or to adjust these rates. The instrument that RBA uses is the cash rate and, if an adjustment is decided, it will be to adjust the cash rate by 0.25%, 0.50 % or 1 per cent.

With the unfolding of the Global Financial Crisis (GFC), the RBA monetary policy response has been to cut the cash rate six times since September 2008 and cuts have been as large as one per cent. These cuts were designed to help Australia avoid the synchronised international recession, which hit all the major economies in the 2008-2010 period, except Australia. Once the decision is made, the RBA Governor announces its decision and, if a rate adjustment is made, banks will potentially make changes to their interest rates the following day. With rise in inflation rate, RBA increases the interest rate and vice versa, to stabilise the economy and keep inflation within the RBA target rate of 2-3%.

RBA also publishes the minutes of its Board meetings two weeks after each meeting and provides quarterly statement on the Monetary Policy. The RBA does not set this interest rate (as the commercial bank sets its mortgage rate), but it continuously influences the rate through its daily financial operations in the money markets. If the RBA buys Treasury notes, the supply of excess reserves in the banking system increases and the cash rate falls. If the RBA sells Treasury Notes, the supply of excess reserves in the banking system decreases and the cash rate increases. Because of these changes in the cash rate, interest rates in general are influenced. In May 2015, RBA cut the official interest rate to 2.0 percent, which remained unchanged for a year.

In May 2016, RBA governor announced a cut in cash rate by 0.25 basis point, to 1.75 percent, which remained unchanged until August 2016. The official cash rate since August 2016 has been at the historical low at 1.50 percent until May 2019. In June 2019, RBA dropped the interest rate to 1.25 %, followed by 1% in July 2019.
Media Release Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.

The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia.

In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system. Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led several central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.

Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low- income growth and declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 21⁄2 per cent over 2019 and 23⁄4 per cent over 2020. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.

Employment has grown strongly over recent years and labour force participation is at a record high. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The unemployment rate is expected to decline over the next couple of years to around 5 per cent. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6 per cent in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

Conditions in most housing markets remain soft, although there are some signs of a turnaround, especially in Sydney and Melbourne. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.