Analysis of Macroeconomic Indicators and Inflation Rates

The assignment provided is a comprehensive analysis of macroeconomic indicators, inflation rates, and monetary policy across different countries. It includes references to academic sources such as books, journals, and articles, as well as online statements from reputable institutions like the Reserve Bank of Australia. The assignment also features illustrations related to inflation rates in China, Japan, Australia, and the United States, as well as a graph of the cash rate in Australia and a money supply curve. It provides insights into the cross-section of money market fund risks and financial crises, the impact of macroeconomic indicators on Indian capital markets, and interest rate pass-through and its relationship with the mortgage rate. The assignment is suitable for students in economics or business studies.

CASE STUDY

Table of Contents
INTRODUCTION...........................................................................................................................1
Q 1....................................................................................................................................................1
Q 2 ...................................................................................................................................................2
Q 3....................................................................................................................................................3
Q 4....................................................................................................................................................4
Q 5....................................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES .............................................................................................................................10

Index of Tables
Table 1: Table of Australia's indicators...........................................................................................4

Illustration Index
Illustration 1: china inflation rate.....................................................................................................3
Illustration 2: Japanese inflation rate...............................................................................................4
Illustration 3: Unites States inflation rate........................................................................................5
Illustration 4: inflation rate of Australia..........................................................................................6
Illustration 5: Graph of Cash rate ....................................................................................................7
Illustration 6: Australia's indicators.................................................................................................9
Illustration 7: money supply curve................................................................................................10
Illustration 8: GDP of countries.....................................................................................................11
Illustration 9: inflation rate of countries........................................................................................12

INTRODUCTION
The economy of policy has a huge impact on economic condition of any country
(Bussière, Delle, and Peltonen, 2014, page 175.). The case study includes the study of Australia's
economic condition. It includes the impact of cash rate on inflation rate and other major
economic factors as well. It will also show the impact of global and domestic macroeconomic
indicators on the decision of changing cash rate. It will also study objectives of monetary policy
and functions of RBA in the economic system of Australia. Moreover, by using the money
market equilibrium model and monetary transmission mechanism the report will show the effects
of increase and decrease of cash rate on inflation rate and economy. The Australian economy is a
stable resilient economy with a GDP of AUD$ 1.69 trillion as of 2017. The total wealth of
Australia is AUD$ 8.9 trillion and the country hasn't seen a period of recession. In the year 2016
the inflation rate in the Australian economy was calculated to be 1.3. Moreover, the rate of
unemployment in the mentioned nation was found 5.7 in and fell to 5.6 as of August 2017.
Q 1
The monetary policy can be referred as the measures focused on effective operations of
the economy or it can be defined as the policies made to sustain and control the cost, supply and
availability of money in the system (Borio, 2012, page, 240). In other words, these are credit
control measures taken by the central bank of a country to ensure effective working of economic
system of the country. The monetary policy controls the flow of money in the economy which
effects declines the demand and the inflation rate also declines due to decrease in demand, which
determines the interest rate. The monetary policy are made by the Reserve Bank of Australia
with certain prime objectives to support economic system of the country.
 Exchange rate : Stability of currency refers to the keeping the exchange rate stable.
Instability in the exchange rate causes inflow and outflow of gold which results in
differentiated balance of payments. Thus, the exchange rates play an important role in the
international trades. It is the main concern of RBA as the economic state of the county is
highly influenced due to high or low of exchange currency. A high or appreciating
exchange will slow down economic activities and pick up from inflation. The Australian
dollar experienced a hike in comparison to the US dollar which resulted in slow pick up
in economic activities and inflation.
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 Full employment : Unemployment is a critical problem which leads to instability in the
whole country. It is considered as socially dangerous and wasteful for the economy . The
unemployment can be defined as a lot of people not working because of inability of the
economy to provide them with jobs. . Full employment is the condition where there is
absence of involuntary unemployment. The full employment is the main objective of
monetary policy as it help to stabilize price in the market. The monetary policy of
Australia has focussed on full employment.
 Currency stability : The currency stability is commonly used in order to judge the
purchasing power for goods and services. It can also be linked to price stability in the
market, that is, the condition in which the prices of products and services remain constant
(Bodie, 2013, page, 156). The currency stability is an important part of the monetary
policy as its value regarding the product and services give rise to inflation or deflation.
Functions of RBA :
The Reserve Bank of Australia is the central bank of the nation and is responsible in
performance of certain functions to mobilize the trade and also monitor all the other banks.
 Framing monetary policy of Australia.
 It also ensures stability of the financial system of the country (Araya). RBA is
responsible for the stability of financial system, it stabilizes the system through control of
money in system
 It is responsible to hold and manage Australia's foreign currency reserves.
 The institution is also given the duty to provide the government and the overseas
organizations with the asked services. The RBA provides the government with various
services such as management of its core account.
 The RBA also avails the responsibility and power to design, produce and issue Australian
bank notes. The Australian Dollars are produces and designed by the RBA.
 The body also sets cash rates for the country, that is the rate of interest for the loans taken
by commercial banks. It is sets and controls the cash rate in the country in the country to
stabilize the economy.
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Q 2
The RBA has prime concern of Australia's economic system and condition. The
macroeconomic indicators influence economic condition of the country. The Australian economy
is developed and integrated at the global level. Australia is in heavy trade with the USA and
other countries. The macroeconomic factors such as economic GDP, industrial production,
headline CPI (Davig, Leeper and Walker, 2011, page 36), exchange rate influence economic
condition of the respective countries. As the US and china also being integrated economies, any
change in their economic condition effect the global economic condition as well. If there is
change in the GDP of USA or China, it adds to the economic growth of the countries which in
turn strengthens the economic condition at the global level. The trade with the USA affects the
economy of USA directly as the fall or rise in the exchange rate between the countries effect the
trade The country with lower exchange rate is unwilling to do trade at the moment which gives
rise to depletion in trade revenue. When the Australian dollar saw rise against the US dollar the
economic activities wandered a slow pick up. Before making the decision about cash rate, the
RBA keeps in macroeconomic indicators of the global economies as any change in the above
factors will affect the economy of Australia. The exchange rate is an important factor which
needs to be considered by RBA when they decide the cash rate as the trade with the USA, Japan
and china highly influence by exchange rate.
3Illustration 1: china inflation rate
(source : China's inflation rate. 2017.)

4
Illustration 2: Japanese inflation rate
(Source : Japan's inflation rate. 2017.)
Illustration 3: Unites States inflation rate
(Sources : US inflation rate. 2017.)

The domestic macroeconomic indicators affect the economic system of Australia in vast
way. The rise or fall in the inflation rate affect the business environment and consumer demand.
The demand for goods decrease during inflation as the consumers cannot afford high priced
products as well as they save money for the further use as well. This decreases demand to a high
constraint (Pal and Mittal, 2011, page 87.). Making changes in the cash rate will affect the
condition of the economy in vast way. The increase in cash rate will increase the interest rate at
which loans are provided to individual which will discourage loan purchase which will decline
invest and demand for products. This will slow the rate of economic growth. On the other hand,
decrease in the cash rate will facilitate loan takers and people will take more loans which will
enhance business and employment in the country. After a while this will result in inflation due
to rise in demand for the products. This demand increases due to abundance of disposable
income in the hands of the population.
5
Illustration 4: inflation rate of Australia
(Source : Measures of consumer price inflation. 2017.)

Interest rate are
Q 3
The cash rate was set to 1.5 % in August 2016 and was kept same in August 2016 by the
RBA. The cash rates were kept unchanged over certain expected situations in the economic
environment (Abbassi, 2012, page no 954). The bank's forecast stated that economy will be
unchanged in coming period. It is expected that growth will be seen at constant of 3 percent for
the next couple of years which indicates that economic conditions are not changing much in the
upcoming years as well. The business is expected to grow in the approaching period. The low
cash rate will facilitate the growing business as 1.5% cash rate will boost loans which will
further help investment. The business needs investment to expand or continue the business. The
expansion of businesses and commencement of new businesses will create new jobs in the
market which will enhance the employment. The retail market also seem to be coming on track
that concludes that people have money to buy goods. The decision of not changing the cash rate
will improve the market further as economy grows in this aspect.
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Illustration 5: Graph of Cash rate
(Source : Cash rate Australia. 2017.)

The slow growth in wage rate and also high level of household debt is expected to limit
spending in the retail market. This step will help in lowering down the interest rates on loans
keeping more income to dispose in the hands of the consumers, which will increase spending.
The wage rates are currently low and are expected to rise in the near future, until then lower cash
rate will ease the condition of the economy as people will be able to satisfy their needs. The
inflation rate is expected to rise in the coming period as the economy strengthens (Coibion, 2012,
page, 1399). The strengthening of economy is based on business growth, hike in the retail
market, increase in employment rate which will strengthen the economic system of Australia.
The RBA presuming the above situations and making a statical strategy for the upliftment of the
economy the governor of RBA, Dr. Philip Lowe decided to keep the official cash rate unchanged
to 1.5 %.
Q 4
The table below shows the difference in macroeconomic indicators that influence
economic growth in Australia.
Table 1: Table of Australia's indicators
Year
GDP (in trillion
USD)
Inflation (CPI) in
%
Unemployment rate ( in
%)
2012 1.538 1.8 5.4
2013 1.567 2.5 5.4
2014 1.46 2.5 6.4
2015 1.345 1.5 6.2
2016 1.205 1.3 5.7
The above table shows that GDP, inflation rate and unemployment rate of Australia. The
GDP is in trillion USD and the table interprets that it increased in 2012 and 2013 and then it
experienced a fall in the coming year till 2016 (Stiglitz, 2010, page 165). The inflation rate took
a hike in the year 2013 and 2014 where after which the government decided to reduce the cash
rate in 2015 to control rising inflation in the country. This step proved to be successful and the
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inflation rate declined in the next couple of years. The unemployment rate increased from 5.4 to
6.4 and then reduced to 6.2 from 2013 to 2015. The increasing unemployment rate was
controlled by the RBA by decreasing the cash rate to 1.5% which worked and the unemployment
rate depleted to 5.7 in 2016.
1 2 3 4 5
0
1
2
3
4
5
6
7
1.54 1.57 1.46 1.35 1.21
1.8
2.5 2.5
1.5 1.3
5.4 5.4
6.4 6.2
5.7
GDP (in trillion USD)
Inflation (CPI) in %
Unemployment rate ( in %)
Illustration 6: Australia's indicators
The above line chart shows the trend of GDP, inflation and unemployment rate in
Australia. GDP shows upward trend in the initial year but later took a downward graph. The
inflation rate in the country increased in starting years and later is seen to be dropping. In the
first two years the unemployment rate remained constant and later rose from 5.4 % to 6.4 % in
the next year. Then it took a downward trend which can be seen after hitting 6.4 %.
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When the money supply curve shows the supply of money and interest according to that.
When there is enough money supply in market the RBA increases the interest rates to stabilize
the money supply. And interest rates are decreased to increase the supply of money.
Money market equilibrium is achieved when the supply of money in the market meets the
demand for it. In other words, it can be said that the supply of money is equal to its demand.
When the cash rate is changed by the RBA, it effects the supply of money in the market. With
the increase in the cash rate, the supply of money in the market decreases. The demand for
money increases which in turn increases the interest rates. People start to spend more of their
earning on the basic needs and also are encouraged to save the money (Woodford, 2011, page
324). This leads to decrease in demand for the products and services. With the decrease in
demand, the prices of products will also decrease, which links to decline in inflation. By the
monetary transmission mechanism, when there is decrease in cash rate from 1.5 % to 1 will
subdue further decline in interest rates. The flow of money increases in the market. This leads to
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Illustration 7: money supply curve
(Source : Shifting Curves. 2017.)

enhancement in loan purchasing and the owners can invest in business easily. New investment
opens opportunity for newer jobs and the rate of unemployment decreases. As it can be seen in
the above chart, the decrease in cash rate in 2015 lead to decrease in the unemployment rate in
same and next year as well. The increased employment and economic growth increase disposable
income leading to increased spending and demand. This will result in stability of inflation.
This chart shows GDP of China, Australia and USA. GDP of China and USA are as much
higher than GDP of Australia (Stiglitz, 2010, page 194). Both the other countries being an
integrated economy affect the economic environment of global market. GDP of USA and China
are in increasing trend whereas GDP of Australia has declined. The economy of Australia is
highly influenced by GDP of other two countries.
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1 2 3 4 5
0
2
4
6
8
10
12
14
16
18
20
8.51 9.6 10.48 11.06 11.2
16.16 16.69 17.69 18.04 18.57
1.54 1.57 1.46 1.35 1.21
GDP (China)
GDP (USA)
GDP (Australia)
Illustration 8: GDP of countries

The chart above depicts the inflation rates of China, USA and Australia. The inflation
rate of USA has increased largely from 2015 to 2016 (Coibion, Gorodnichenko and Wieland,
2012, page. 1389). This concludes that, prices in USA have increased rapidly in one year
Whereas, in Australia the inflation rate has decreased which depicts loss in prices. Chinese
inflation rate is in upward trend from 2014 which depicts increase in prices, which is same as
USA. The policy of decreasing the cash rate adopted by Australia has controlled inflation in the
nation.
Q 5
The cash rates is the interest rate at which the commercial banks lend money to each
other in order to maintain cash needs. The cash rate is decided by the Reserve Bank of Australia
and it remains the same until the body changes it in the next meeting (Davig, 2011, page 35).
The cash rate affect the economic conditions indirectly. Cash rate has its effect on a lot of factors
in the environment. The increase or decrease of the cash rate in near future will affect the major
sections of the economic environment.
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1 2 3 4 5
0
0.5
1
1.5
2
2.5
3
2.55 2.51
1.41
1.62
2
1.74
1.5
0.76
0.12
1.26
1.7
2.5 2.5
1.5
1.3
inflation rate (China) in %
Inflation rate (USA) in %
Inflation rate (Australia) in %
Illustration 9: inflation rate of countries

1. Consumption demand : Consumption demand can be defined as the need for goods by an
individual or group in a particular period (Desai, 2010, page 121). The demand for any
product is highly dependent on the disposable income. The increase in cash rate will
decrease the disposable income as the interest rates on loans given to individual is
increased which will decrease the demand for products. The decrease in cash rates will
leave more disposable income to the consumers increasing the demand for products and
services. For example : The demand for luxury products will decrease if the cash rate
decreases cause there is less money in the hands of consumer so they buy necessary items
only.
2. Business investment : Business investment refers to the money people invest in new or
old business to commence or expand the business. The investment in business is mostly
done by owner of the business through finance via bank loans. The increase in cash rate
will result in enhance in the interest rates of the loans given by bank. For example High
interest rates discourage the investors to take loans leading to less business investment.
The decrease in cash rate will reduce interest rate on loans encouraging the investors to
take loans which will increase business investment.
3. GDP : Gross domestic product can be referred as the market value of final goods
produced in a period. The GDP of a country is evidentially effected by increase and
decrease in cash rates. The rate of interest is affected by change in the cash rate which in
turn affects the demand of products in the market (Valadkhani, 2012, page 342). The
increase in cash rate decreases the demand and due to less demand and less earning the
production also takes a decline which decreases the GDP. The decrease in cash rate will
hike the demand for goods which in turn increases the production giving rise to
improvement in GDP.
4. Inflation : Inflation is a condition in the market which arises due to sudden rise in the
prices of products. Increase in cash rate will leave less money at the hands of consumers
creating less demand and the companies will decrease prices to create demand. This will
lead to stability in inflation rate or increase same. The decrease in cash rate will give rise
to more demand and the prices will increase accordingly, giving rise to inflation.
5. Housing market : The increase in cash rate will lead to fewer people encouraged to take
loans and the housing market will hit low (Acar, 2010, page, 3261). Decrease in cash rate
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will encourage more people to take loans to buy and build houses giving rise to the prices
in market. For example : The housing rates in some parts of Australia is on hike due to
less cash rate.
The long term economic growth cannot be achieved by low cash rates. The 1.5 % cash rate by
the RBA will improve the economy in the initial time and the cash flow will increase (Asari and
Et.al. 2011, page, 51). The more disposable income will give rise to more business and
employment will enhance. This will increase the GDP of the country and the country's economic
condition will rise. The new emerging economy will increase new markets and sustain new
business opportunities to the people of the country. After a while,, the population will have much
more income to dispose then the needs and production and inflation rate will hit a rapid hike
which may lead to decline of the economy.
CONCLUSION
The case study shows influence of cash rate on the Australian economy. It includes the
objectives of monetary policy and functions of RBA. It concludes that RBA is the major
controlling party of economy and also responsible for framing monetary policy. It can also be
inferred that global macroeconomic indicators influence the economy of Australia in large way.
The study also evaluates the reasons behind the unchanging of cash rate by the governor of RBA
and how the cash rate influences the inflation rate in the country. It concludes that the change in
cash rate has high influence on inflation as the inflation occurs by rise in price which is effected
by demand in the market, this demand occurs due to money in the hands of people which is an
effect of low cash rate. The report also concludes that change in cash rate, that is increase or
decrease has adverse and favourable impact on various factors of the economy. It recommends
that the further decrease in the cash rate may result in sudden increase in inflation rate.
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REFERENCES
Books and journals
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rates during the financial crisis. Journal of Macroeconomics, 34(4). pp.945-954.
Acar, Y., Kadipasaoglu, S. & Schipperijn, P. (2010). A decision support framework for global
supply chain modelling: an assessment of the impact of demand, supply and lead-time
uncertainties on performance. International Journal of Production Research, 48(11). pp.3245-
3268.
Alcock, J., Finn, F. & Tan, K. J. K., (2012). The determinants of debt maturity in Australian
firms. Accounting & Finance, 52(2), pp.313-341.
Araya, M. N., Reserve Bank of Australia.
Asari & Et.al. (2011). A vector error correction model (VECM) approach in explaining the
relationship between interest rate and inflation towards exchange rate volatility in
Malaysia. World Applied Sciences Journal. 12(3). pp.49-56.
Bodie, Z. (2013). Investments. McGraw-Hill.
Borio, C. & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: a missing link
in the transmission mechanism?. Journal of Financial Stability. 8(4). pp.236-251.
Bussière, M., Delle Chiaie, S., & Peltonen, T. A. (2014). Exchange rate pass-through in the
global economy: the role of emerging market economies. IMF Economic Review. 62(1). 146-
178.
Coibion, O., Gorodnichenko, Y. & Wieland, J. (2012). The optimal inflation rate in New
Keynesian models: should central banks raise their inflation targets in light of the zero lower
bound?. Review of Economic Studies. 79(4). pp.1371-1406.
Czinkota, M., Ronkainen, I.A. & Moffett, M.H. (2011). International business. Wiley.
Davig, T., Leeper, E. M., & Walker, T. B. (2011). Inflation and the fiscal limit. European
Economic Review. 55(1). 31-47.
Desai, R. (2010). Consumption demand in Marx and in the current crisis. In The national
question and the question of crisis. (pp. 101-143). Emerald Group Publishing Limited.
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Keynes, J. M. (2016). General theory of employment, interest and money. Atlantic Publishers &
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McCabe, P. E. (2)010. The cross section of money market fund risks and financial crises.
Pal, K. & Mittal, R. (2011). Impact of macroeconomic indicators on Indian capital markets. The
Journal of Risk Finance, 12(2). pp.84-97.
Stiglitz, J. E., Sen, A. & Fitoussi, J.P. (2010). Mismeasuring our lives: Why GDP doesn't add up.
The New Press.
Storm, S. & Naastepad, C.W.M. (2012). Macroeconomics beyond the NAIRU. Economics
Books.
Valadkhani, A., & Anwar, S. (2012). Interest Rate Pass‐Through and the Asymmetric
Relationship between the Cash Rate and the Mortgage Rate. Economic Record, 88(282). 341-
350.
Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. princeton
university press.
Online
National estimates. (2014). [Online]. Available through
<http://www.abs.gov.au/ausstats/abs@.nsf/Previousproducts/6202.0Main%20Features2Jul
%202014?opendocument&tabname=Summary&prodno=6202.0&issue=Jul
%202014&num=&view= >.[Accessed on 7 September 2017].
Statement on Monetary Policy. (2017). [Online]. Available through
<http://www.rba.gov.au/publications/smp/2017/aug/overview.html> . [Accessed on 7 September
2017].
Statement by Philip Lowe, Governor: Monetary Policy Decision. (2017). [Online] . Available
through: <https://www.rba.gov.au/media-releases/2017/mr-17-15.html >. [Accessed on 16
September 2017].
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