Australian Inflation and Interest Rates

This assignment delves into the dynamics of inflation and interest rates in Australia. It examines historical inflation data, the Reserve Bank of Australia's (RBA) target inflation rate, and its impact on monetary policy decisions. The analysis includes a discussion on the relationship between inflation and real interest rates, highlighting how the RBA adjusts interest rates to manage inflation within the target range.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student:
Name of the University:
Author note:

S
D
Price
QuantityQ1
P1
P2
Q2’ Q2Q1’
A
B C
F
1ECONOMICS ASSIGNMENT
Part A
Answer 1
Figure 1: Law of demand and supply
(Source: Author)
The laws of demand and supply are the most fundamental principles of economics. The
law of demand says that if the price of a product or service rises, its quantity demanded falls,
other things remaining the same. On the contrary, the law of supply says that the quantity
supplied of a product or service rises if its price rises and falls if its price falls, when other things
remain unchanged (Baumol & Blinder, 2015). Other things refer to the income of the consumers,
tastes and preferences, technological advancement etc. From the above diagram, it can be seen

2ECONOMICS ASSIGNMENT
S
D
P
Q
S
D
Q
P
S2
P2
Q2
Before Technological Advance
After Technological Advance
P3
Q3
P1
Q1
E3
that at price P1, the quantity demanded was Q1 and quantity supplied was Q1’. When the price
fell to P2, the quantity demanded increased to Q2, from point B to F, and quantity supplied fell
to Q2’, from point C to A. This happens due to law of demand and supply.
Answer 2
Figure 2: Shifts in market demand and supply due to technological advancement
(Source: Author)

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Before technological advance hit the market, the equilibrium price and quantity of ipad was P1
and Q1. After the advent of technological advances, the market supply changes. Technological
advancement is a supply side factor determining extent of supply. Using more sound technology
producers are able to produce at much lower cost (Rios, McConnell & Brue, 2013).. This allows
them to increase production as well a supply in the market. As a result supply curve shifts
rightward to S2. This makes he price fall to P2 and equilibrium quantity to rise to Q2 The shift in
supply in presence of stable demand creates excess supply and pushes market price down. The
lower price and technologically improvised product enhances demand for ipad and that shifts the
demand outward. This leads to new market equilibrium E3 and the market price to become P3
with quantity even increased than before to Q3. P3 is higher than P2. The reason behind the rise
n price is due to increasing demand depleting the prevailing excess supply in the market.
Answer 3
Market failure refers to the situation of inefficient allocation of resources. A most
common example of market failure is the case of public goods consumption (Bleda & Del Rio,
2013). The government produces public goods, such as, roads, national defense, for all the
citizens and in exchange collects tax. However, some people do not pay taxes and the
government cannot limit the consumption to the tax paying customers only, as these goods
cannot be produced for private consumption. The government cannot even put competitive prices
on this type of goods (Baldwin & Scott, 2013).

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Answer 4
Oligopoly is type of market, where there are few sellers and huge number of buyers and
the products are slightly differentiated. In this market, few firms act like a group, control the
entire market and create barriers for new firms to enter the market. In Australia, the banking
sector is an example of oligopoly market. Four banks, namely, NAB, Commonwealth Bank,
ANZ and Westpac Bank, are the pillars of the entire banking sector and has captured almost 70%
of the market share (Tabak, Fazio & Cajueiro, 2012). They control the finance of the nation for a
long time and act like a group. Their policies create barriers for new banks to join the sector.
Part B
Answer 1
Three recent media articles have been chosen on the macroeconomic issue of inflation in
Australia and its relationship with unemployment and interest rate. The articles are taken from
ABC news, The Guardian, and Bloomberg. All these articles have discussed the inflation in the
country and its different aspects.
Answer 2
Australia has experienced the longest period of economic growth among all the
developed countries of the world. For almost 26 years, the nation has been going through a phase
of economic growth, stable unemployment and standard rate of inflation.

5ECONOMICS ASSIGNMENT
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
3.5
2.3
4.4
1.8
2.8
3.3
1.8
2.4 2.5
1.5 1.3
Australia Inflation, consumer prices
(annual %)
Australia Inflation,
consumer prices (annual
%)
Figure 3: Inflation in Australia, 2006-2016
(Source: World Bank, 2017)
The inflation was higher in 2008-2009 during the global financial crisis but after that, it
has gone down. In the first quarter of 2017, the inflation rate was more than 2%, which happened
first time in the past two years.
Answer 3
The article published in The Guardian on 26th April, 2017, highlights that although the
inflation rate has increased above 2%, it is unlikely that the interest rate would rise. It has been
found that the prices for petrol and electricity have gone up considerably but there was a
significant drop in the fruit prices. The inflation rate increased but still remained within the target
band of 2% to 3% of the RBA. The RBA was expected to keep the cash rate at 1.5%, which is a
record low (The Guardian, 2017). Again, ABC News pointed out that inflation rate was 1.9% in
the June quarter due to the price falls in automotive fuel and competition in the food and clothing
retail. It has pointed out that higher price of AUD is a concern for the government (Ryan, 2017).

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Bloomberg shows that lower oil prices and tradable goods prices have helped in lowering the
inflation (Heath & Thornbill, 2017). From the analysis of the articles, the key points can be
summarized as below.
 The employment status has improved in Australia recently, with an increase in full time
jobs
 The part time jobs has also increased considerably to raise the employment level
 The service sector generated more jobs, reflecting an end to the mining boom.
 There is growth in wages, leading to higher demand for goods and services in the country
 Interest rate did not rise due to inflation, hence there is stability in the money market
 Fuel and electricity prices were higher while the food prices went down.
 Price of tradable goods fell due to higher value of AUD. However, the fall in
international demand has been offset partly by the domestic demand.

7ECONOMICS ASSIGNMENT
Inflation (%)
Unemployment (%)
6%
5%3%
2%
B
A
Answer 4
Figure 4: Phillips Curve
(Source: Author)
Phillips curve shows the inverse relationship between inflation rate and unemployment in
the country. As the inflation increases, unemployment falls. With increase in employment,
people have more money, leading to higher demand for goods and services in the domestic
economy (Daly & Hobijn, 2014). This results in inflation. In case of Australia, it is seen that as
inflation rises marginally in a quarter, level of unemployment falls.

8ECONOMICS ASSIGNMENT
Nominal interest rate
Inflation rate
B
A
E
Target inflation rate
Rate of monetary policy
4321
4
3
2
1
5 6
45 deg line showing real interest rate of 2%
Figure 5: Inflation rate and interest rate
(Source: Author)
Real interest rate is the inflation adjusted interest rate. When rate of inflation is higher
than the target inflation rate, the central bank needs to take action for increasing interest rate
(King & Low, 2014). In Australia, the inflation rate was around 2% for a long time, which is the
targeted rate. Hence, RBA did not increase the interest rate.

9ECONOMICS ASSIGNMENT
References
Baldwin, W., & Scott, J. (2013). Market structure and technological change (Vol. 18). Taylor &
Francis.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Bleda, M., & Del Rio, P. (2013). The market failure and the systemic failure rationales in
technological innovation systems. Research policy, 42(5), 1039-1052.
Daly, M. C., & Hobijn, B. (2014). Downward nominal wage rigidities bend the Phillips
curve. Journal of Money, Credit and Banking, 46(S2), 51-93.
Heath, M., & Thornhill, J. (2017). Australian Inflation Misses Bottom of Central Bank's
Target. Bloomberg.com. Retrieved 20 October 2017, from
https://www.bloomberg.com/news/articles/2017-07-26/australia-second-quarter-
consumer-prices-rise-less-than-expected
King, M., & Low, D. (2014). Measuring the''world''real interest rate(No. w19887). National
Bureau of Economic Research.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and
policies. McGraw-Hill.
Ryan, P. (2017). RBA optimistic about the future, if the Aussie dollar doesn't climb higher. ABC
News. Retrieved 20 October 2017, from http://www.abc.net.au/news/2017-08-04/rba-
slightly-downgrades-growth-forecast-for-australian-economy/8774854

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Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The relationship between banking market
competition and risk-taking: Do size and capitalization matter?. Journal of Banking &
Finance, 36(12), 3366-3381.
The Guardian. (2017). Australian inflation above 2% but experts say interest rate rise
unlikely. the Guardian. Retrieved 20 October 2017, from
https://www.theguardian.com/business/2017/apr/26/australian-inflation-above-2-but-
experts-say-interest-rate-rise-unlikely
World Bank. (2017). Inflation, consumer prices (annual %) | Data. Data.worldbank.org.
Retrieved 20 October 2017, from https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG