Analysis of the Australian Economy

This paper analyzes the pragmatic approach of the statement made by the governor of the Reserve banks of Australia regarding recovery of the Australian economy. It highlights some other important issues owing to obtain a stable economic growth.

Running head: ANALYSIS OF THE AUSTRALIAN ECONOMY
Analysis of the Australian Economy
Name of the Student
Name of the University
Author Note

1ANALYSIS OF THE AUSTRALIAN ECONOMY
Abstract
The objective of this paper is to analyze the pragmatic approach of the statement made by the
governor of the Reserve banks of Australia regarding recovery of the Australian economy. The
effective inclusion of the monetary policy and fiscal policy is expected to bring appropriate
outcome for the economy. Nonetheless, the paper highlights some other important issues owing
to obtain a stable economic growth.

2ANALYSIS OF THE AUSTRALIAN ECONOMY
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Justification of the governor’s prediction regarding the Australian economy............................5
Analysis regarding the policy implication on the Australian economy.......................................9
Suggestions related to the effective policy measures................................................................10
Recommendations......................................................................................................................11
Conclusion.....................................................................................................................................13
References......................................................................................................................................14

3ANALYSIS OF THE AUSTRALIAN ECONOMY
Introduction
Australia has recently experienced a downturn progress in the economy. The sluggish
growth rate in the housing market is considered as a vital concern for this weak economic
performance. As per the governor of the Reserve Bank of Australia, the interest rate has
currently cut down by 1% in order to boost the investment for the real estate sector. This
announcement is expected to enhance the overall revenue of the real estate market. The cut down
in the interest rate is expected to encourage aspiring home buyers to take loans from the banks.
Hence, the financial sector will enhance a growth in the accumulated capital. Further, the central
bank of Australia is aimed at improving the inflation rate within a range of 2% to 3% along with
reducing the unemployment rate to 4.5% for the upcoming years. This results in the development
of the entire economy. The government has played a key role in maintaining the overall progress
of the employment sector. The growth in employment obviously enhances the purchasing power
of the consumers. Therefore, the aggregate demand gets intensified. This results in the increment
of the average price level of the commodities and therefore, the economy is likely to face
inflation. Nonetheless, the Australian economy was able to control the lower inflation rate of
1.8% during the last year. As per the findings, the government has obtained this impressive
outcome owing to the notable amalgamation of both monetary and fiscal policies. The following
section discusses about the important roles of the Australian government in determining the
effective policies for the economic progress.
Discussion
Performance analysis of the Australian economy

4ANALYSIS OF THE AUSTRALIAN ECONOMY
As per the International Monetary Fund, the GDP growth is projected at around 2% in
2019, lower than the previous year’s GDP growth rate of 2.8% in 2018. The growth rate has been
pulled down owing to the international trade dispute between the USA and China. This certain
trade issue has reduced the trade growth to about 34% during the last year. The emerging
uncertainty in the global merchandise sector has reduced the investment level in the Australian
economy (Bishop & Cassidy, 2017). However, the economy has experienced with a steady
growth in the employment sector throughout the last couple of years. In 2018, the estimated
employment percentage of the total population was around 62%. The impressive outcome
affirms the productive performance of the government policies. The central bank of Australia has
decided to slash the interest rate by 1% point owing to intensify the consumer expenditure on the
physical asset market including the estate market. In this way, the employability and productivity
related to the estate business will be improved. This results in the development of the entire
economy. The employment growth will intensify the output level as well as the job opportunity
in the economy. Meanwhile, this will encourage the purchasing power of the consumers (Baxa,
Horváth & Vašíček, 2014). The cumulative demand of the buyers will surge up. In relation to the
emerging market demand, the aggregate supply may or may not be increased. The resources
cannot be possibly altered within a short-period of time. Therefore, supply level remains
unaltered. The comprehensive price structure turns to be more expensive for the consumers.
People are compelled to pay higher price in order to buy a good (Mendes, 2017). The soaring
price level leads the economy into the inflation. In this context, both the monetary and fiscal
policies play a key role to keep the inflation rate at low level. The perfect collaboration of these
two policies can bring effective outcome for the economy. The expansionary fiscal policy
generates employment opportunity, enhances development process (Neely, 2015). The expansion

5ANALYSIS OF THE AUSTRALIAN ECONOMY
of the export sector is also acknowledged as an attractive outcome for an economy. This reduces
the trade deficit. The government emphasizes on the development work, which in return,
accelerates the growth in the development indicators including the human capital and standard of
living. The inhabitants of Australia are registered with high purchasing power parity.
Justification of the governor’s prediction regarding the Australian economy
According to the governor of the RBA, the authority is aimed at reducing the
unemployment rate to 4.5% along with keeping the inflation rate within a range of 2%to 3%.
Abatement of both the unemployment level and the inflation rate is the vital concern for every
economist. The policy makers seek proper amalgamation of financial policies in order to obtain
the desirable outcome (Kuttner & Shim, 2016). In the context of the Australian economy, the
governor has directed the Treasure to apply fiscal policy along with the expansionary monetary
policy to encourage the economic progress. The expansionary monetary policy is expected to
enhance the purchasing power of the consumer as the supply of money increases. Followed by
that average quantity of demand and supply soars up. This results in the improvement of the total
output level of the economy (Bjørnland & Halvorsen, 2014). On the other hand, the fiscal policy
amplifies the government expenditure in order to intensify the development process. The
adjustment of the tax rate is the key tool in determining the level of the government expenditure.
Nonetheless, the simultaneous diminution in the inflation rate and the unemployment level raise
questions on the validity of the economic laws. The decrease in the inflation rate lowers the
nominal wage and therefore, the employment rate does not get improved (Gillitzer & Simon,
2015). The unemployment rate continues to increase as inflation drops down. The rise in
inflation is likely to intensify the wage rate, which in return, allures the works to get employed.
In this way, the rising inflation results in the improvement of the employment rate. However, the

6ANALYSIS OF THE AUSTRALIAN ECONOMY
incremental impact on the employment level dose not persist for the long-term (Wu & Xia,
2016). The employment level remains stable at a certain level with respect to the long term. This
economic phenomenon has been explained by the renowned economist, named as A.W. Phillips.
As per the economist, there exists inverse relationship between the unemployment rate and the
inflation.
Figure 1: The Phillips curve
Source: (Created by the author)
The figure1 enlightens the inverse association with the help of the Phillips curve. The
curve shows that inflation together with the unemployment do not move towards the same
direction. Growing rate of inflation initially calls for the climbing wage rate. This causes a hike
in the number of employees (Monnin, 2014). The wage earners are willingly engaged in the jobs
without realizing the real purchasing power of the commodities. Meanwhile, these employees
gradually realize their real wage in the long term compared to the short term. The wage earners

7ANALYSIS OF THE AUSTRALIAN ECONOMY
understand that incremental wage rate is unable to enhance their choice of commodities (Kudrna,
Tran & Woodland, 2015). Due to the cumulative impact of the abrupt growth in the price level,
the employers initially raise the wage rate to retain the existing employability. The number of
employees also get enhanced. In the figure 1, the unemployment rate is U1 in correspondence
with the inflation rate of P1%. Further, increase in the inflation rate to P2% lowers the
unemployment rate, resulting in that number of employees gets enhanced. This theory is
applicable for the short period. Conversely, the long terms provides enough time to the wage
earner to realize their own real strength of the purchasing power.
Figure 2: Long-run Philips curve
Source: (Created by the author)
Referring to the figure 2, the long run Philips curve is parallel to the perpendicular axis. This
implies that change in the inflation rate is unable to bring any impact on the unemployment rate.
The unemployment rate remains constant at Un whether the inflation rate is at P1% or P2%. The

8ANALYSIS OF THE AUSTRALIAN ECONOMY
fluctuation rate in the inflation cannot influence the employment situation. Moreover, the lower
inflation rate does not encourage the hike in the number of the service people (Lothian, 2017).
Altogether, this economic law raises questions on the validity of the statement made by the
governor of the RBA. From the pragmatic point of view, this statement will not yield stable
outcome for the Australian economy. The diminution impact on the unemployment level and
inflation rate is impossible to be realized in terms of the economic development (Morris &
Wilson, 2014).. The authority may be able to pull down the inflation rate with the help of
effective policy, though, the improvement in the unemployment rate is yet considered as a cause
of concern to the policy makers.
As a part of the monetary policy, the RBA has decided to decline the interest rate in order
to enhance the purchasing power of the consumer. The improvement in the purchasing power
intensify the cumulative demand. Owing to meet the emerging demand, the suppliers will
escalate the production process amplifying the employment level (Bauer & Neely, 2014).
However, the reduction in the interest rate is unable to yield persisting positive impact on the
employment growth. In this case, the Australian government has also decided to keep the
aggregate demand at high level with the help of the fiscal policy. The fiscal policy can fetch the
effective solution as per the long-term basis. The fiscal policy can keep the aggregate demand
high on the means of cutting tax rate or giving subsidies. The cut in the tax rate enhances the
disposable income of the buyer, resulting in that the purchasing power gets enhanced. Both the
aggregate demand along with the cumulative production level do not fall down (Rey, 2015).
Subsequently, the economy will be able to retain the desirable output level in addition to the
lower inflation rate with the help of the limiting money supply policy. Considering the pragmatic
view of the Australian economy, the application of monetary policy is more effective compared

9ANALYSIS OF THE AUSTRALIAN ECONOMY
to the fiscal policy. The government can enhance the employment level by means of decreasing
interest rate, whereas, it can regulate the growing inflation rate through tightening money supply
(Hajkowicz et al., 2016). In respect of the fiscal policy, the government finds it difficult to
implement in terms of incurring the huge cost and lack of time required for the effective
outcome. Nonetheless, the monetary policy is easy to implement and less time consuming.
Analysis regarding the policy implication on the Australian economy
In case of the monetary policy, the authority controls the inflation rate and supply of
liquid money. The government increases the interest rate owing to either control the inflation rate
or the investment level. The rise in the interest rate discourages the people in the case of taking
loans from the financial institutions (Atkin & La Cava, 2017). This pulls down the investment
level. In contrast, the banks decide to cut down the interest rate to boost the investment level.
The lowering interest rate encourages the loan activity. As a consequence of falling interest rate,
the liquid money and the purchasing power get intensified in the money market. Overall, the
aggregate price level faces a sharp rise owing to increase in the cumulative demand (Raess &
Pontusson, 2015). Owing to the limited source of supply, the suppliers increase the product price
to meet the emerging demand for the product. This situation leads the economy to the inflation
and therefore, the real purchasing power gets declined. Income disparity, growing unemployment
rate and falling saving-investment ratio are the common phenomenon when there is a high
inflation rate in the economy (Ballantyne & Langcake, 2016). To control the sudden growth in
the aggregate demand the monetary authority increases the interest rate. This results in the
contraction in the investment level and the liquid money. The saving amount in the banks gets
enhanced.

10ANALYSIS OF THE AUSTRALIAN ECONOMY
On the account of reviving the economic situation, the government applies two types of
fiscal policy, such that, expansionary and contractionary fiscal policy. Referring to the
contractionary fiscal policy, the government reduces the government expenditure owing to
control the aggregate demand and supply (Perry & Rowe, 2015). The government expenditure is
done in terms of giving subsidies and providing special types of monetary allowances. This
reduces the purchasing power of the consumers. This results in the contraction in the output level
and enhancement in the employment level. The government applies contractinary fiscal policy to
abate the detrimental impact of the inflation. During the course of inflation, the commodity price
increases at abrupt level (Miyazaki, 2014). The standard of living as well as the purchasing
power of the consumer get declined. In contrast, the expansionary fiscal policy is applicable to
enhance the output growth in the economy. On the means of the expansionary fiscal policy, the
government increases the government expenditure owing to influence the economic progress.
The development work gets enhanced in order to improve the output level (Downes, Hanslow &
Tulip, 2014). The overall development infrastructure helps in improving the standard of living
and purchasing power of the buyers. Both the employability and employment are the favorable
outcomes of this situation. The employment to the total population ration gets improved owing to
the increase in the fiscal expenditure. Further, this is able to bring effective outcome during the
course of stagflation. In the case of stagflation, the output level remains constant. This results in
the stagnant outcome in the cumulative demand and supply. The economic activities get
apparently stopped. The unemployment level aggravates (Carvalho, 2015). In this case, the
expansionary fiscal policy infuse capital in the economy, which in return, intensifies the
economic activities. The economic activities enhance both the cumulative demand and supply.
As a consequence of that, the market price level gets enhanced.

11ANALYSIS OF THE AUSTRALIAN ECONOMY
Suggestions related to the effective policy measures
In order to make the polices to be imperative, the government must understand the
genuine necessities of the domestic economy as well as the international economy. The
government should formulate the effective strategies to obtain desirable output. The foremost
function of the policy makers is to develop a preference doable list in accordance with the
urgency of the objectives. The fiscal policy together with the monetary policy play a significant
role in developing a productive outcome for the economy. The nature of the choice of the policy,
such that, contractionary or expansionary depends on the urgency of the country’s requirements.
The same condition is also applicable for the monetary policy. The economy should adopt the
expansionary kind of policies when the economy is experiencing the sluggish growth rate. The
employment growth deeps down, which in turn, slow the economic progress. In this case,
expansionary monetary policy including reduction in the interest rate and augmented money
supply is highly approachable. In contrast, the contraction in the money supply is applicable
when the inflation rate is increasing. Money supply needs to be controlled owing to pull down
the inflation rate (Mishra & Ray, 2014). Meanwhile, the expansionary fiscal policy acts as a
relevant tool in order to boost the economic development. The government declines the tax rate
as to enhance the aggregate demand. The cumulative purchasing capacity consequently
intensifies increases the cumulative supplied amount. Altogether, the economy is capable of
enhancing better output level for the economy (Eccleston & Woolley, 2014). In contrast, the
government should minimize the public expenditure during the course of the recession period as
the economy produces output below its capacity. In this case, the resources are not utilized at
optimum level. Overall, the productivity and employability get declined all through such a

12ANALYSIS OF THE AUSTRALIAN ECONOMY
situation. The government intervention is highly desirable owing to intensify the production
level.
Recommendations
Understanding the urgency of the requirements: The proper assessment of the requirements
must be considered carefully before articulating any planning strategy. The strategies need to be
designed on the basis of the importance of the economic issues.
Development of appropriate polices: The applied policies should be efficacious in nature. The
decision makers must develop a policy framework in order to fetch optimum outcome using the
existing resources. Inappropriate planning policies apparently cause huge expenditure without
yielding beneficial impact on the economy.
Policy structure should be reflective in nature: The structure of the government initiatives
should be reflective and comprehensive to the beneficiaries. Any kind of polices, such that, fiscal
or monetary policy must be implemented with the aim of drawing the optimum advantages
related to the development procedure.
Optimum usage of resources: The economy must utilize the existing resources optimally in
order to enhance the economic growth. In this way, the dependency on the other imported goods
assuages reflecting the improvement in the trade deficit condition.
Comparative advantage needs to be addressed: In this way, the policy makers strives to
understand what kind of production technology should be adopted by the economy. For an
example, the labor abundant country should adopt labor intensive technology, however, capital
advancement country must practice the capital-intensive production methods.

13ANALYSIS OF THE AUSTRALIAN ECONOMY
Capability of the government: The government must be capable of the rolling out the programs
developed to meet the immediate requirements. The inappropriate actions taken by the
government slows down the economic growth instead of aggravating the output progress. The
governmental bodies should take prudent actions during the course of executing the development
programs.
Comprehensive role of the economic entities: On the account of drawing effective outcome,
the inclusive actions should be pursued by all the entities of the economy. Each and every part of
the economy, such that, land, labor and capital must participate and work together owing to
intensify the pace of economic progress.
Conclusion
In a concluding note, the RBA should adopt the perfect collaborative strategies in order
to yield a productive outcome. The fiscal policy as well as the monetary policy need to be
applied in accordance with the relevance features of the requirements. Application of individual
policy is unable to bring effective and stable solution for the economy. Further, the monetary
policy is more approachable compared to the fiscal policy as the development work requires
huge cost and less time. The fiscal policy controls the tax rate and public expenditure, whereas,
the monetary policy controls the money supply by the means of changing the interest rate. The
change in the interest rate is considered as the most effective tool controlling the inflation rate of
the economy. In a nutshell, this intensifies the cumulative demand and supply improving the
employment rate in the economy.

14ANALYSIS OF THE AUSTRALIAN ECONOMY
References
Atkin, T., & La Cava, G. (2017). The Transmission of Monetary Policy: How Does It
Work?. RBA Bulletin, September, 1-8.
Ballantyne, A., & Langcake, S. (2016). Why Has Retail Inflation Been So Low?. RBA Bulletin,
June, 9-17.
Bauer, M. D., & Neely, C. J. (2014). International channels of the Fed's unconventional
monetary policy. Journal of International Money and Finance, 44, 24-46.
Baxa, J., Horváth, R., & Vašíček, B. (2014). How does monetary policy change? Evidence on
inflation-targeting countries. Macroeconomic Dynamics, 18(3), 593-630.
Bishop, J., & Cassidy, N. (2017). Insights into low wage growth in Australia. RBA Bulletin,
March, 13-20.
Bjørnland, H. C., & Halvorsen, J. I. (2014). How does monetary policy respond to exchange rate
movements? New international evidence. Oxford Bulletin of Economics and
Statistics, 76(2), 208-232.
Carvalho, P. (2015). Youth unemployment in Australia. Policy: A Journal of Public Policy and
Ideas, 31(4), 36.
Downes, P. M., Hanslow, K., & Tulip, P. (2014). The effect of the mining boom on the
Australian economy. Reserve Bank of Australia research discussion paper, (2014-08).
Eccleston, R., & Woolley, T. (2014). From Calgary to Canberra: resource taxation and fiscal
federalism in Canada and Australia. Publius: The Journal of Federalism, 45(2), 216-243.

15ANALYSIS OF THE AUSTRALIAN ECONOMY
Gillitzer, C., & Simon, J. (2015). Inflation Targeting: A Victim of Its Own
Success?. International Journal of Central Banking, 11(4), 259-287.
Hajkowicz, S. A., Reeson, A., Rudd, L., Bratanova, A., Hodgers, L., Mason, C., & Boughen, N.
(2016). Tomorrow’s digitally enabled workforce: Megatrends and scenarios for jobs and
employment in Australia over the coming twenty years. Australian Policy Online.
Kudrna, G., Tran, C., & Woodland, A. (2015). The dynamic fiscal effects of demographic shift:
The case of Australia. Economic Modelling, 50, 105-122.
Kuttner, K. N., & Shim, I. (2016). Can non-interest rate policies stabilize housing markets?
Evidence from a panel of 57 economies. Journal of Financial Stability, 26, 31-44.
Lothian, J. R. (2017). Equilibrium relationships between money and other economic
variables. Essays in International Money and Finance: Interest Rates, Exchange Rates,
Prices and the Supply of Money Within and Across Countries, 31.
Mendes, P. (2017). Australia’s welfare wars: The players, the politics and the
ideologies. Aotearoa New Zealand Social Work, 29(2), 145-148.
Mishra, A., & Ray, R. (2014). Spatial variation in prices and expenditure inequalities in
Australia. Economic Record, 90(289), 137-159.
Miyazaki, T. (2014). Fiscal reform and fiscal sustainability: Evidence from Australia and
Sweden. International Review of Economics & Finance, 33, 141-151.
Monnin, P. (2014). Inflation and income inequality in developed economies. CEP Working
Paper Series.

16ANALYSIS OF THE AUSTRALIAN ECONOMY
Morris, A., & Wilson, S. (2014). Struggling on the Newstart unemployment benefit in Australia:
The experience of a neoliberal form of employment assistance. The Economic and
Labour Relations Review, 25(2), 202-221.
Neely, C. J. (2015). Unconventional monetary policy had large international effects. Journal of
Banking & Finance, 52, 101-111.
Perry, M., & Rowe, J. E. (2015). Fly-in, fly-out, drive-in, drive-out: The Australian mining boom
and its impacts on the local economy. Local Economy, 30(1), 139-148.
Raess, D., & Pontusson, J. (2015). The politics of fiscal policy during economic downturns,
1981–2010. European Journal of Political Research, 54(1), 1-22.
Rey, H. (2015). Dilemma not trilemma: the global financial cycle and monetary policy
independence (No. w21162). National Bureau of Economic Research.
Wu, J. C., & Xia, F. D. (2016). Measuring the macroeconomic impact of monetary policy at the
zero lower bound. Journal of Money, Credit and Banking, 48(2-3), 253-291.