Economic Principles and Decision Making

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles and Decision Making
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ECONOMIC PRINCIPLES AND DECISION MAKINGIntroduction
The economy of Australia has made a record for experiencing the longest period of
economic growth that occurred in the past two decades, since July 1991. The rate of economic
growth has fluctuated over the years but the country has been successful in maintaining the
positive growth even during the global financial crisis. Despite experiencing a decline in the
largest sector, mining, Australia was able to mitigate the negative impact on the economy. It has
been stated by Bell (2017) that the monetary policies taken by the Reserve Bank of Australia
(RBA) played a significant role in helping the country to overcome the challenges generated
from the global financial crisis. In 2017, the GDP of Australia was AUD 1.69 trillion, and its
total wealth as of 2016 was AUD 8.9 trillion (Greasley et al. 2017). The inflation rate has been
more or less stable over the years and in the first quarter of 2019, the inflation rate was 1.9%
indicating a moderate economic growth. Regarding another significant macroeconomic variable,
that is, unemployment rate, it is around 5% in 2018-19 despite creation of jobs (Pandey, 2019).
Cash rate is a very significant factor that influences the money market. It is an important
component of monetary policies designed by the RBA. Cash rate represents the overnight money
market rate of interest. The changes in the cash rate have knock-on effects on various moving
parts of the economy, such as, investment, spending, inflation and unemployment (Alim &
Connolly, 2018). It is assumed that the cash rate might decline further from 1.5% and the GDP
might also fall from 3% in 2019. These would imply a slower growth of the Australian economy.
Along with that, the largest trading partner of Australia is China which is also experiencing an
economic slowdown, which would also affect the growth rate of the economy of Australia. This
report aims to discuss the above mentioned factors of the domestic economy as well as the

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ECONOMIC PRINCIPLES AND DECISION MAKINGexternal factors, such as, the economic condition of China and its impact on the Australian
economy in an attempt to explore and evaluate the growth possibility of Australia.
Discussion
Economic growth and impact of cash rate
Economic growth is defined as the increase or expansion in the size of a nation’s
economy over a period of time. The size of the economy is usually measured by the gross
domestic product (GDP) which represents total output level in a given financial year that
occurred within the geographic boundaries. The total production level in a nation depends on
various factors of production along with various intangible aspects in the economy, such as,
money supply, level of demand and expenditure, interest rates, unemployment, inflation, tax
rates, level of import, exports and tariffs and many more (Johnson, 2017). Hence, the RBA has a
significant role to play in influencing the total level of production in Australia. Among the
measures taken by the RBA, cash rate is an important element that is controlled by the RBA to
control the money supply in the economy, which in turn affects the demand and supply of goods
and services in the economy as well as other factors of economic growth.
As highlighted by RBA (2019), cash rate is the metric that is used to represent the rate of
interest on the overnight funds. These funds are those which are used by the commercial banks
for lending one another for meeting their daily cash needs on an overnight basis. However, cash
rate also serves as the benchmark rate for all types of lending, such as, mortgages, interest rates
on the savings accounts, exchange rate and many more aspects of the monetary policy designed
by the central bank, that is, Reserve Bank of Australia (RBA). Hence, cash rate affects the
channels of money supply in the economy. For example, when an economy is strong and demand

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ECONOMIC PRINCIPLES AND DECISION MAKINGis pushing up the prices of goods and services, that is, inflation is going up, then the cash rate is
raised to slow down the economy and keep the inflation under a healthy range (rba.gov.au,
2019). Similarly, when the RBA decreases the cash rate, it aims to encourage investment and
spending and push the prices in the market up to accelerate the growth through the increase in
the flow of money in the economy. Thus, it can be said that rise (fall) in cash rates indicates a
rise (fall) in the interest rate in the economy.
RBA maintained the cash rate at one of the highest points of 4.75 during 2011 and since
2012, the cash rate has been cut by RBA. According to RBA (2019), since mid 2016, the cash
rate was kept fixed at 1.50%, however, it has been observed that there was a further fall in the
cash rate. This implies that the Australian economy has been experiencing a slower economic
growth than the expected and to boost the economy, RBA decreased the cash rate further.
The decision on the cash rate depends on various factors, such as, inflation, employment,
economic growth and international economy (Brown & Karpavičius, 2017). Australia has an
inflation rate of 1.9% which is less than the target range of 2% to 3%. Hence, this implies that
the economy needs a boost up and decrease in the cash rate is beneficial for that. It is found from
the last recorded information, RBA decreased the cash rate by 25 basis points in June 2019 and
further by 25 basis points in July which has pushed the cash rate down to 1% from 1.5%
maintained since August 2016 (RBA, 2019). The condition in the international economy is a
major factor that affects the decision on cash rates by the RBA. Thus, any turbulence in the
international economy, such as, the global financial crisis, has prominent impact on the cash rate.
A strong overseas economic growth especially in the trade partners implies higher demand for
the Australian products, while in the weak financial condition or issues with the trade partners
the economy of Australia gets affected. Similarly, the employment or unemployment level in