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Principles of Macroeconomics PDF

Added on - 07 Oct 2021

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Question 1
Based on the latest minutes of the RBA, it is apparent that the interest rates in the near future
would increase and would not remain constant. This is quite evident from the commentary of
the RBA.
Question 2
The three reasons to support the above decision are as follows.
1) Major central banks globally are increasing the interest rates. This is particularly true for
Federal Reserve which is expected to continue on the rate hiking spree considering the robust
growth that is witnessed in the US economy. During the given year, the AUD has already
shed about 8% against the USD as highlighted in the commentary (RBA, 2018). Further,
increases in the interest rate by the Federal Reserve would put more pressure on the AUD and
may cause further depreciation of the currency which would need to be contained (Mankiw,
2014). In this regards, it would be necessary for the Reserve Bank of Australia to hike the
cash rate so that the falling currency may get some support.
2) On the domestic front, the economic growth has been quite robust especially in the first
half of 2018. Even though in the third quarter, the GDP growth has become tepid, it continues
to remain strong. Also, this is supported by other macroeconomic data such as falling
unemployment and increasing inflation which has currently achieved the lower end of the
targeted range. It is expected that once the inflation rate is at the middle of the recommended
range, the RBA would increase the cash rate (RBA, 2018).
3) The economic growth across major developed countries (barring the exception of EU and
Japan) has been quite strong. As a result, the exports of Australia are improving with
increased prices of ore and mining exports. With the various efforts being made by the
Chinese government, it is expected that in the near term the Chinese economy would be on
track. Considering that China is the largest trading partner of Australia, this would further the
economic growth and hence make a very strong case for cash rate hike (RBA, 2018).
Question 3
On one hand, the increase in cash rate would lead to higher cost of bank credit which would
have adverse impact on the financial performance of the company since the client has a
variable interest rate loan. The interest expense would have to be increased in the budgeted
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