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.
1. Business cycle can be referred as upward or downward movement of the gross domestic product. Business cycle can be defined in terms of periods of recession or expansion as business cycle represents the long term trend. Business cycle can also be defined in terms of contraction or expansion period of a nation in terms of the fluctuation in the economic activities of a nation. There are several indicators of the business cycle and these are explained as under-
Gross domestic production of the Australia is the gross value of all the goods and services of the Australian economy. Gross domestic production is the most used factor for measuring the economic growth on a country. The below mentioned diagram displays the GDP growth of the Australia for past ten years.
Inflation is the constant decay in the purchasing power of the money. Inflation can be measured in terms of retail or wholesale, consumer price index. Consumer price index is known as CPI. As the inflation has huge impact over economy, government should take necessary steps to curve the ever increasing inflation rate. The countries which cannot control the inflation rate are bound to face the economic downfall. Generally the inflation rate is on higher side for undeveloped countries. The below mentioned figure displays the rate of inflation in Australia.
Unemployment is an important factor for any economy. Unemployment exists when people are ready to work but there is not job for them in the country. Unemployment is an indicator of the performance of an economy. If a country wants to progress and boom its economy, than it has to lower down unemployment rate in the country. Details of employment rate and various factors has been provided in the below mentioned figure.
Source: (Rba.gov.au, 2015)
The two terms relevant for this purpose are current account balance and trade balance. It is important for a country to maintain the current account deficit. The current account balance and the trade deficit are shown in the below mentioned figure.
The position of Australia on global business cycle map has been shown in the below figure. It is evident that the Australia is in the phase of expansion.
Source: (Economy.com, 2015)
2. (a) If a government wants to moderate the business cycle, it should prepare and implement the effective monetary policy to moderate the business cycle. Monetary policy can be used to control the quantity of money. Thus monetary policy helps in the stabilisation of business cycle as its helps in controlling the rate of inflation and rate of unemployment in the economy. It is the responsibility of the government to decide about effective policy to moderate business cycle. The monetary policy can be expansionary monetary policy or contradictory money policy. The expansionary monetary policy is also known as easy money policy. The expansionary monetary policy is liable for increase in the supply of money and decrease in the interest rate in the economy. The expansionary monetary policy is generally applied in recession cycle.
The second policy is known as contractionary or the tight money policy. The contractionary policy is responsible for decrease in the supply of money and the increase in the interest rate. The contractionary policy can be used for controlling inflation. It is advised that Australian government should apply tight money policy to moderate the business cycle as the business cycle of Australia is in expansion mode.
(b) The monetary policies in Australia are implemented by the Reserve Bank of Australia. An analysis of the growth rate indicates that in Australia the growth rate is on the moderate side and there is an indication of decline in the economy. If a projection of growth rate is made than it is expected that the growth rate may be well below the average rate. The average inflation rate can be predicted as in rage of 2%. The growth rate in the wage rate can also be expected on average side. The investment rate in Australia is on the lower side and the expectations of the investors are on the higher side. The RBA is trying to provide support for the growth of the Australian economy and this has caused an increase in demand. There are several factors which RBA considers to support the economy. Some of these factors are present inflation rate, growth rate, exchange rate, capital account.
(c) The AD-AS model has been shown in the below mentioned diagram. The X axis represents the national output and the Y axis represents the price level. The demand curve is dependant upon the interest rate. An increase in the interest rate causes a leftward shift of the demand curve and a decline in the interest rate leads to rightward shift in the demand curve.
An analysis of the above diagram indicates that when the aggregate demand curve shifts to the left, the inflation rate is lowered as well as there is reduction in the national output in the economy. In the same manner, when there is increase in interest rate, the aggregate demand curve shifts to the right. This causes increase in the inflation rate as well as in the national output (Rba.gov.au, 2015).
3. (a) The value of Australian dollar is affected by several factors. Some of these factors are inflation rate, confidence of business, confidence of consumers, economy growth rate, stock market performance, health of housing market. Exchange rate in the economy can be impacted by the positive impact on the economy. Change in economy by in line with change with exchange rate is presented in the below mentioned figure.
It is clear from above mentioned diagram that when there is increase in the demand for Australian dollar, the demand curve moves upward and due to this reason the exchange rate appreciates and there is increase in equilibrium quantity of the Australian dollar. On the other side, when there is decline in the demand for the currency, there is a downward trend in the demand curve and this causes depreciation in the exchange rate and a fall in the equilibrium quantity.
The above mentioned diagram displays that when there is increase in supply (S1), there is decline in the exchange rate and this causes increase in equilibrium quantity. In the same way when there is decline in the supply (S2), this causes increase in the exchange rate and reduction in equilibrium quantity.
(b) The event of decline of the Australian dollar falls below the Equilibrium exchange rate (E*), in an indication that there is depreciation in the exchange rate of the Australian dollar. When the Australian currency declines, the foreign importers gain from such situation and the country itself loses. Thus the countries which imports goods and services from other countries will now have to pay less for the imported goods and services and thus these will be benefited but the exporting country will be under loss.
(c) The value of the Australian dollar will fall against other currencies, when there is depreciation in the Australian dollar. The decline of Australian dollar will be having several impacts over the economy. The decline of Australian dollar will increase the inflation in the country. The inflation will increase because the cost of goods and services imported will increase. On the other side it is true that the decline in the Australian dollar will cause development of export industry in the country. However this will cause a decline in the import demand. The inflation will cause an increase in the wage rate. However if government can implement effective policies, lower the interest rate and develop the export sector, than the decline in the Australian currency can also be beneficial to the country.
References
Farleigh, R., 2013. Taming the Lion: 100 Secret Strategies for Investing. Harriman House Limited.
Jason, Z., 2011. Corporate governance and alternative performance measures: evidence from Australian firms. Australian Journal of Management, 36(3), pp.371–386.
McLean, I.W., 2012. Why Australia Prospered: The Shifting Sources of Economic Growth: The Shifting Sources of Economic Growth. Princeton University Press.
Mutunga, J., 2014. Developing and understanding of Australia’s economy over the last two years. GRIN Verlag.
Steve, R., 2013. A comparison of two economies UAE and Australia. GRIN Verlag.
Wiggin, A., 2012. The Little Book of the Shrinking Dollar: What You Can Do to Protect Your Money Now. John Wiley & Sons.
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