Reference no: EM132651949

ECON11026 Principles of Economics - Central Queensland University

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 and builds on the economic fundamentals 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 fiscal and monetary policies. In this essay, you will refer to the chapters outlined in the prescribed textbook, relevant journal articles, covid-19 related newspaper reports, Australian government's fiscal policy and Reserve Bank of Australia (RBA) economic response to impact of global Coronavirus. The purpose of this assessment is to develop skills in interpreting current macroeconomic indicators, analysing RBA functions and role of monetary policy its strengths, weaknesses and its implications on consumption, investment, government expenditure, housing market and in containing the economic impact caused by COVID-19 pandemic.

Assessment Topic

Discuss the current macroeconomic environment in Australia given the economic impact of global COVID-19 coronavirus pandemic, and critically discuss the use of Monetary Policy recovery package, complementing Fiscal 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 interest rate decisions since March 2020 based around Covid-19. Guiding questions, will help you structure your response. Do not forget to apply the DADA framework, using data-tables and graphs to support your response. A marking rubric is posted on the Moodle site, which can help you to understand what is required to reach your desired level of achievement.

Background Information: RBA Monetary Policy

The RBA board meets first Tuesday of each month (not in January) at the RBA - Martin Place, Sydney. Prior to the meeting, board members are provided with analysis of the economy and the financial markets 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.

Since January 2020, the COVID-19 coronavirus has gradually spread to all the countries resulting in a global public health emergency/crisis impacting all sectors of the economic activities, agriculture, mining, manufacturing, and services (including financial services). It has impacted the households, businesses, production, distribution, import-export, and consumption. In order to stop the spread of virus, regulations such as social distancing, closing borders, grounded airlines, working from home, have all disrupted national and global supply chains, trade, travel, international education, hospitality, tourism, and transportation. In response to COVID-19, RBA has taken measures through monetary policy tools to support the financial system and the Australian economy.

With the unfolding of the Global Financial Crisis (GFC), the RBA monetary policy response has been to cut the official cash rate since September 2008. 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 RBA Governor announces its decision, the banks 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 meet the 3 objectives of monetary policy- currency stabilisation by keeping inflation within the target rate 2-3%, maintain full employment for economic prosperity and welfare of Australians.

The RBA does not set the mortgage rate (commercial bank does), but RBA 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. In May 2015, RBA cut the official interest rate to 2.0 %, 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 %, which remained unchanged until August 2016. The official cash rate since August 2016 has been at the historical low at 1.50 % until May 2019. In June 2019, RBA dropped the cash rate to 1.25 %, followed by 1% in July 2019 and a further cut to 0.75% in October 2019, remaining unchanged until February 2020.

In March 2020, RBA board responded to global coronavirus health crisis twice: on the 3rd of March to cut the official cash rate to 0.50%, and on the 19th of March RBA further cut the rate to historically low of 0.25%, and yield on 3-year Australian Government bonds to 25 basis points, announcing a monetary policy package, complementing the government's expansionary fiscal policy recovery package. Global health Coronavirus pandemic means global expected growth will be slower with rising unemployment, falling productivity, financial market volatility with falling income, and increasing government debts. Together these policies will support jobs to create full employment, business investment, income, inflation target, contain the spread of the virus and achieve sustainable economic growth and recovery.

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 in current COVID-19 global pandemic? 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) Define and draw the four stage of business cycle and explain when expansionary or contractionary fiscal and monetary policies are applied.

Question 2: Explain the three 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: In response to disruptive COVID-19 economic and financial impact, in March 2020, the Governor of the RBA, Dr Philip Lowe, decided to cut official cash rate twice from 0.75% to historical low of 0.25%, with inflation within the target rate at 2.2%, unemployment at 6.2 % , GDP growth1.4% and slow growth in housing loans. Explain why the RBA dropped the official cash rate to 0.25%. Justify your answer with reasons and evidence. Note: Information is available in the monthly minutes of RBA.

Question 4: Draw graph and explain the circumstances in which the RBA Board might adopt a contractionary monetary policy (increase1% to 1.5 %) to keep inflation from rising, or an expansionary monetary policy (decrease 1 % to 0.25%) to stimulate economic recovery from the negative impact of global pandemic on the economy.

Question 5: What are the determinants of long-run economic growth? Is the expansionary monetary policy response package by RBA, during COVID-19 pandemic sustainable to meet monetary policy goals, macro-economic objectives and long-run economic growth? Or complementary fiscal policy is also required for economic recovery Yes/No, justify your answer with reasons- use several references. Discuss the effect of low interest rate supply of credit, on household consumption, business investment, employment, exports, inflation and housing market recovery. 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 2 year to see the trends, when answering this question.