Economy of Australia: Microeconomics and Macroeconomics

This document provides an in-depth analysis of the economy of Australia, focusing on both microeconomics and macroeconomics. It discusses the banking industry, market structure, fiscal and monetary policies, and their impact on the Australian economy. The document also explores the effects of collusion among major banks, the role of government policies in countering recessionary conditions, and the relationship between unemployment and economic growth.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

1ECONOMY OF AUSTRALIA
Table of Contents
Part a: Microeconomics..............................................................................................................2
Answer to question 1..............................................................................................................2
Answer to question 2..............................................................................................................2
Answer to question 3..............................................................................................................3
Answer to question 4..............................................................................................................4
Part b: Macroeconomics.............................................................................................................4
Answer to Question 1.............................................................................................................4
Answer to question 2..............................................................................................................5
Answer to question 3..............................................................................................................6
Answer to question 4..............................................................................................................7
Answer to question 5..............................................................................................................7
References..................................................................................................................................9

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Part a: Microeconomics
Answer to question 1
Commonwealth Bank, ANZ, NAB and Westpac are the leading banks in Australia
that dominates the banking industry (Statista 2017). The way these banks control the
industry, it takes the form of an oligopoly market structure. The major attributes of banking
industry with oligopoly in Australia are barrier to entry and restriction for consumers in
switching banks. These four banks together serve above 80 percent of the lending market in
Australia.
In the period of Global Financial Crisis (GFC), unlike most of the countries Australia
handled its banking industry tactfully, which is a laudable task for that period. Policies taken
by the Reserve Bank of Australia and Australian Prudential Regulatory Authority (ARPA)
are the key factors that drove the banking sector efficiently and kept it away from being
victim of GFC. The major policies were restricting banks from merging and competition
limitation leading to reduction of venturesome policies of banks. Further, increased deposit
guarantee prevented small banks from bankruptcy. Hence, these policies enabled banks to
sustain the poor state of the financial market.
Answer to question 2
Four major banks of Australia if collude will gain monopoly power over the market.
The banks for their products will charge high prices to gain more profit. The small banks take
the price fixed by the big banks as given and price their products accordingly. Therefore, with
the full control over the market, the big banks will charge high prices for lower quantity of
products and gains super normal profit. Hence, due to collusion among big banks the price
quantity fell below competitive quantity. The equilibrium price and quantity after collusion is
at PM and QM shown in the Figure 1 given below

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Figure 1: Impact of Collusion in Banking Industry in Australia
Answer to question 3
The major four banks in Australia use their market power to gain more profit by
charging high price for products. Moreover, collusion among the major banks enables them
to act as monopoly player (Telser 2017). Taking advantage of the situation the banks will
exploit the customers, charge high prices by providing less quantity of product as shown in
Figure 1, and earn supernormal profit. The small banks also face adverse consequences and
might shut down failing to compete. The government thus strive to end the possibility of
collusion by increasing and sustaining the competition to avoid loss of social welfare. As a
preventive measure, the government lowered the barriers to entry to the banking sector and
APRA formulated a new framework for licensing to permit new entrants in the industry to
operate.

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Answer to question 4
Entry in a competitive market occurs until there is a scope of earning supernormal
profit (Pindyck and Rubinfeld 2014). This implies that in short run when firms earn above
normal profit new firms enter earn super normal profit. The continuous entry increase supply
of the industry and push the price lower and entry stops when price reaches normal profit
equilibrium. The mechanism is shown in figure 2
Figure 2: Entry mechanism in competitive market
In the figure P1 is the price where firms supernormal profit in competitive market. Perceiving
the scope of profit, entry of new firms occurs and supply of the market increases, as a result
the supply curve shifts rightward. The price of the product fall to P* and no more entry
occurs as firms earn normal profit only.
Part b: Macroeconomics
Answer to Question 1
The fiscal policy formulated by the government outside existing policies is commonly
known as discretionary fiscal policy. Changes in government spending and tax rates are the

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major instrument of the concerned policy. These policies are used to counter shocks of
business cycle by contracting and expanding the economy. Assuming a recession condition,
the effect of expansionary policy is shown in the figure 3. The fiscal policy taken is either
reduction in tax rate or increase in government spending. The effect will be increase in price
level and GDP due to expansion in aggregate demand.
Figure 3: Discretionary fiscal policy and countercyclical effect
Answer to question 2
Increase in labor force and weak economic condition of Australia in 2014 increases
unemployment rate. During this period due to unwanted increase in unemployment rate, the
economy of Australia forced to operate below full employment condition. Hence, due to high
unemployment rate and poor economic growth a recessionary gap occurred in the economy
(Ugwuanyi and Ugwunta 2017). In figure 4 given below, is the output at full employment and
Y* is the output at which Australia was operating in 2014. (YF -Y*) is the recessionary gap
caused due to the said condition. Hence, Australian economy was experiencing recession
phase as indicated by the poor economic growth and high employment.

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Figure 4: Equilibrium position of Australia in 2014
Answer to question 3
The government reduced corporate tax rate by 1.5% and increases government
spending in infrastructural development to counter the recession phase (smh.com.au 2014).
The expansionary fiscal policy implemented by the government, increases aggregate demand.
As a result, employment rises with growth of the economy.
Figure 5: Impact of fiscal policy expansion during recession

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Answer to question 4
Lower the cash rate higher will be the lending and thereby investment increases. In
order to stimulate the economy and increase aggregate demand the RBA reduced the cash
rate by 0.25 basis points (rba.gov.au 2019). The expansionary monetary policy that RBA took
is required to boost the economic growth given the weak economic condition of the country.
The expansionary policy led to aggregate demand increase causing increase in price level and
GDP.
Figure 6: Impact of monetary policy expansion during recession
Answer to question 5
The price of imported goods increases due to depreciation of domestic currency
(Singh 2013). The lower value of dollar increases the price of both inputs and final goods
causing cost of production to increase and thereby increase inflation in Australia.
The current unemployment rate (7%) in Australia demands an expansionary fiscal
policy such that the problem of unemployment mitigates. However, implementing traditional

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expansionary policy increases the inflation rate and is not desirable as the current rate is at
already at 4% high. Hence, to solve the problem a supply side policy is taken as it seems
appropriate. Tax credit on investment is a supply side policy, if implemented will encourage
the investors to invest more (Wood, Thornley and Grace 2013). Increase in investment
increases production and supply. The supply curve shifts rightward and unemployment falls
with decrease in price
level.
Figure 7: Policy evaluation of tax credit on investment

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References
Pindyck, R. and Rubinfeld, D., 2014. Microeconomics GE. Pearson Australia Pty Limited.
rba.gov.au 2019. Cash Rate. [online] Reserve Bank of Australia. Available at:
https://www.rba.gov.au/statistics/cash-rate/ [Accessed 27 May 2019].
Singh, P., 2013. Depreciation of Rupee in Indian Economy: An Analysis,“. International
Journal of Innovations in Engineering and Technology (IJIET), 2(4), p.332.
smh.com.au 2014. What we know so far about the Abbott government's 2014 federal budget.
[online] The Sydney Morning Herald. Available at: https://www.smh.com.au/national/what-
we-know-so-far-about-the-abbott-governments-2014-federal-budget-20140512-zra3n.html
[Accessed 27 May 2019].
Statista (2017). Largest banks in Australia by assets 2017 | Statistic. [online] Statista.
Available at: https://www.statista.com/statistics/434596/leading-banks-in-australia-assets/
[Accessed 27 May 2019].
Telser, L.G., 2017. Competition, collusion, and game theory. Routledge.
Ugwuanyi, U.B. and Ugwunta, O.D., 2017. fiscal policy and economic growth: An
Examination of selected countries in Sub-Saharan Africa. International Journal of Academic
Research in Accounting, Finance and Management Sciences, 7(1), pp.117-130.
Wood, D., Thornley, B. and Grace, K., 2013. Institutional impact investing: practice and
policy. Journal of Sustainable Finance & Investment, 3(2), pp.75-94.

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