Econ11026 Macroeconomic Environment Answers Assessment Answers

This assessment task requires you to write an essay that demonstrates your theoretical and applied knowledge relating to the macro economy and stabilisation 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 GDP, economic growth, unemployment, inflation, macroeconomic stabilisation polices, particularly, monetary policy. In this essay, you will refer to the chapters outlined in the prescribed text book, relevant journal articles, various reports of the Reserve Bank of Australia and Australian government websites. The purpose of this assessment is to develop skills in interpreting current macroeconomic indicators, analysing macroeconomic policies and their implications for the wider economy. Assessment Topic Discuss the current macroeconomic environment in Australia whilst critically evaluating the role of monetary policy as a stabilisation tool. Background Information Australia has experienced an unprecedented economic growth, achieving the longest economic expansion on record (27 years) without recession.

 

It also escaped the Global Financial Crisis relatively unscathed and pulled off the end of the mining boom. These credentials hide some of the underlying structural issues lingering on in the Australian economy. Among them are the rising property prices and housing affordability, a sluggish economy, a stagnant wage growth rate, rising household and government debt, a rapidly declining manufacturing sector, and concerns of job security amidst of mass automation. In this economic environment, the role of macroeconomic policy cannot be ignored. Particularly, the recent monetary policy stance adopted by the Reserve Bank of Australia has left the official cash rate at its historic low of 1.5 per cent for the thirteenth consecutive month. In this essay, you will discuss the recent trends of macroeconomic indicators and critically evaluate the role of monetary policy including its strengths and weaknesses as a stabilisation tool of a modern economy. 2 Structure of the essay.

 

1. Introduction The introductory paragraph(s) should broadly outline the topic that will be discussed, explain why it is important and a brief outline of the main sections that you will discuss in the remainder of the essay.

2. Body The body of the essay contains the main sections. Please do not include the title ‘Body’ in your essay. You may divide the body section into sub-sections by including sub-headings. You need to conduct research on the current trend in economic growth, inflation rate, unemployment rate and other macroeconomic indicators using multiple sources. As a minimum,

 

you should:

• Provide an overview of current economic environment in Australia;

• Identify the stage of business cycle based on the latest economic indicators;

• Describe the macroeconomic goals;

• Define monetary policy and its objectives. With appropriate diagrams, describe the monetary policy mechanism and the impact of monetary policy on Aggregate Demand;

 

 

• Evaluate the latest Monetary Policy Statement of the Reserve Bank of Australia (RBA) and explain the main factors that influence the current monetary stance in Australia;

• Discuss the impacts of the current low interest rate on the housing market, business investment and household debt.

• Discuss the limitations of the current monetary policy implemented by the RBA. Explain why some believe that monetary rules are a better policy option than discretionary inflation targeting. You are free to arrange the above sections as you wish and do not need to follow the same order.

 

However, your arguments and diagrams should be organised in a logical and coherent manner. You must also define key terms before analysing them. All diagrams must be labelled and discussed in the text. Embedded JPEG files of hand-drawn diagrams are acceptable and you must cite the source if your diagram is sourced from a published source. All definitions and ideas obtained from published material must be appropriately referenced. In any economic analysis, it is good practice to follow the DADA principle – Definitions, Assumptions, Diagrams and Analysis.

 

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. References All references should follow the APA style and reference list should include all the references that you have cited in an alphabetical order. Submission Details All submissions must be via the Turnitin plagiarism detection system. Please tick the terms and conditions box in order to submit your work properly. If your similarity index is too high, please make changes with appropriate references and paraphrasing and resubmit. However, subsequent submissions take longer time to display the similarity index, therefore submit your work early.

Answer:

Global economy is now undergoing several structural change. In a world of globalization, changing dynamics on one nation spread over other nation. Measuring economic performance of a nation involve analysis of economic performance in different dimensions. Some of the key economic indicators include GDP, unemployment, rate of inflation and others. Every economic aims to achieve a stable economic growth along with a low level of unemployment and stable price level. In order to achieve these objectives government supports using policy tools of fiscal and monetary policy.

Monetary policy works through adjustment in the supply of money by use of varying instruments like interest rate, open market operation and other money market tools. The paper conducts a study on economic environment of Australia. The robust uninterrupted growth history of Australia has always made the economy attractive to the researchers (Hellwig  & McAllister, 2016). Special focus has been given on existing structural problems like crisis in housing market, contraction of manufacturing, low wage growth and rising debt of households. In reference to current state of the economy the framework of monetary policy has been critically evaluated.

Economic environment of Australia: overview

                Economic performance of nation is measured in terms of indicators measuring economic performance in various dimension. These indicators include Gross domestic product, Unemployment rate, rate of inflation, trade balance, interest rate and others. The trend analysis of these indicators over a sufficiently long time period provides a brief overview of macroeconomic scenario in Australia.

Gross Domestic Product (GDP)

GDP growth  

Change in GDP from one year to another measure growth in GDP and is also considered as a measure of economic growth of a nation. When GDP increases at an increasing rate then the economy is said to progress rapidly.

 As shown from the above graph the dynamic of economic growth in Australia has undergone several fluctuations. The peak and trough in economic growth indicates phases of recession and expansion. Growth in the past few years is found to be significantly lower as compared to that in the previous period. The economy quickly recovered shocks of global financial crisis in 2008 and constituted a sharp increasing trend reaching close to 5 percent (Nielsen, 2017). However, reaching peak in 2013, economic growth started to decline and remained around 2 to 3 percent.

Unemployment rate

Inflation

Structural problem in Australian economy

                With a dynamic change in external and internal economic environment, some significant structural changes have been observed in the economy. Some problems that needs special attention include housing affordability crisis, contraction of manufacturing factor, slow growth of wages, increasing household debt and such others.

Housing affordability crisis

Low growth of wage

Business cycle experience of Australia

Macroeconomic goals and monetary policy

                Every economy tries to attain some major macroeconomic goals. The first and foremost important goal is to achieve a steady and sustainable economic growth. Steady growth indicates long-term trend growth without side effect of external or inflationary pressure. A sustainable growth implies attainment of economic growth for present generation without sacrificing growth prospect of future generation. Achieving stability in price level is another major macroeconomic goals. The targeted inflation rate varies across countries.  For Australia, RBA targets in attaining a stable inflation rate lying between 2 to 3 percent. Besides this, operating at the level of full employment, maintaining stability in external and internal economy are included under macroeconomic goals of a nation.

                In order to achieve the set of macroeconomic goals government takes some supportive measure using fiscal and monetary policy tool. Monetary policy is a demand sided policy that works through adjustment in supply of money and prevailing interest rate. The main objective of monetary policy is to attain a stability in price level. Both a persistently rising or declining inflation rate has detrimental effect on long-term steady growth rate. A stable price level on the other hand supports a stable growth rate in the economy (Goodwin et al., 2015). Through price level stability monetary policy aims to attain a steady economic growth. Monetary policy also helps to achieve fiscal objectives through managing public debt and government borrowing.  Debt management policy is used to maintain a stability in government bond and security market.

Monetary policy and transmission mechanism

Current Monetary policy framework of Australia

                The current framework of monetary policy in Australia has put stress on maintain a low and stable interest rate.  The policy of cutting the interest rate however works with a limited extent. In addition to achieving targeted inflation level, the low interest rate leads to some unwanted structural problem in the economy. Household debt has risen significantly (Brown & Gray, 2016). In the housing market, problem of housing affordability has come to the front. Declining saving rate results in rising household indebtedness. Growing household debt has now become a major concern than inflation targeting. This is the reason why some economists favor rule based monetary policy over discretionary inflation targeting. Under a discretionary monetary policy, there always remain an uncertainty regarding what interest rate the monetary authority sets in response to economic shocks (Goodwin et al., 2015). This in turn raises uncertainty in firm and business decision. Targeting only consumer prices instead of targeting overall price level narrowed the objective of monetary policy as a tool of economic stabilization.

Conclusion

                The essay summarizes state of macroeconomic environment of Australia. Economic environment has been examined based upon performance of output, employment and price level. GDP is the indicator of output performance. From the historical trend in GDP it has been observed that the economy experienced a decline in the Gross Domestic Product since 2013 leading to a decline in economic growth. Despite job growth, unemployment has remained a major problem in Australia. So far as price level is concerned, inflationary pressure has remained under control following inflation targeting policy of RBA. RBA designs monetary policy to stabilize the economy.

The effect of changing dynamics of money supply affects interest rate in the money market and influences output and prices through affecting aggregate demand. The trend in historical cash rate shows a continuous declining trend reflecting an ease monetary policy. The low interest rate today has become less affective because of associated structural problem in form of rising household debt and rising property prices. The situation further worsens from gradual downturn of manufacturing sector. The interruption in robust growth path of Australia creates a room for criticizing current monetary policy advocating an alternative monetary policy.

List of References

Australia Households Debt to GDP | 1977-2018 | Data | Chart | Calendar. (2018)

Australia Inflation Rate | 1978-2018 | Data | Chart | Calendar. (2018). 

Australia Unemployment Rate | 1978-2018 | Data | Chart | Calendar. (2018). 

Australia's slow wage growth, weak sentiment bolster... (2018). 

Berument, H., & Froyen, R. T. (2015). Monetary policy and interest rates under inflation targeting in Australia and New Zealand. New Zealand Economic Papers, 49(2), 171-188.

Bishop, J., & Cassidy, N. (2017). Insights into Low Wage Growth in Australia. RBA Bulletin, March, 13-20.

Brown, S., & Gray, D. (2016). Household finances and well-being in Australia: An empirical analysis of comparison effects. Journal of Economic Psychology, 53, 17-36.

Cash Rate | RBA. (2018). 

Chen, Y., Zhang, H., Tam, K. L., & Wu, M. (2018). The Making of Contemporary Australian Monetary Policy-Backward-or Forward-Looking?. International Journal of Economics and Finance, 10(6), 127.

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in context. Routledge.

Gregory, R. G., & Smith, R. E. (2016). 15 Unemployment, Inflation and Job Creation Policies in Australia. Inflation and Unemployment: Theory, Experience and Policy Making, 325.

Hellwig, T., & McAllister, I. (2016). Does the economy matter? Economic perceptions and the vote in Australia. Australian Journal of Political Science, 51(2), 236-254.

House prices fall for the first time since 2012 | The New Daily. (2018).

Hutchens, G. (2018). Australia ‘locked’ into low inflation and low wage growth, economists fear. 

Kent, C. (2018). The Business Cycle in Australia | Speeches | RBA. 

McLaren, J., Yeo, A., & Sweet, M. (2016). Australia is facing a housing affordability crisis: Is the solution to this problem the Singapore model of housing?. Australasian Accounting Business & Finance Journal, 10(4), 38.

Nielsen, R. W. (2017). Population and Economic Growth in Australia: 8,000 BC-AD 1700 Extended to 60,000 BC. Journal of Economic and Social Thought, 4(1), 41.

Performance of manufacturing industry: a quick guide – Parliament of Australia. (2018).

Sloman, J., Norris, K., & Garrett, D. (2013). Principles of economics. Pearson Higher Education AU.

Statement on Monetary Policy | RBA. (2018).