Economic Assignment Solution (Doc)
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Running head: ECONOMIC ASSIGNMENT Economic AssignmentName of the StudentName of the UniversityAuthor note
1ECONOMIC ASSIGNMENTTable of ContentsIntroduction................................................................................................................................2Objectives of monetary Policy...................................................................................................2Main functions of Reserve Bank of Australia............................................................................3Economic relation of Australia with China and USA................................................................4Money Market Equilibrium........................................................................................................6Monetary Transmission mechanism..........................................................................................8Conclusion................................................................................................................................18References................................................................................................................................19
2ECONOMIC ASSIGNMENTIntroduction Monetary policy is one of the major policy tools for government to influence majoreconomic variables. In Australia, Reserve Bank of Australia designs monetary policyframework. Apart from maintaining stability in the price level, RBA also aims at ensuringstability in exchange rate, full employment, equilibrium in external balance account andcontrol other activities in financial market. Recently, governor of RBA has announced thedecision of keeping the cash rate at the exiting level o0f 1.5 percent.The low rate is not the result of domestic economic condition. The scenario in globalmarket and economies of its trading partner determine the official rate in Australia. RBAfears that a further cut in cash rate will lead to an increase in housing debt to the alreadyindebted housing market. There are pressures from advanced economies as well. The paper analyzes the recent framework of monetary policy in Australia. Theperformance of Australia in its GDP, unemployment, inflation, fiscal deficit and housingmarket data of Australia for the last five year is considered. Cash rates of the economyinfluences performance of the economy. The low and stable cash rate is expected to stabilizeAustralian economy. Objectives of monetary PolicyMonetary policy refers to the policy framework designed to maintain stability in theprice level and ensure a long term growth rate through influencing the available moneysupply in the economy (Fontana & Setterfield, 2016). The main objectives of monetarypolicies are as follows
3ECONOMIC ASSIGNMENTNeutrality of Money: This objective is designed because of the fact that economicfluctuations are mostly resulted from monetary changes occur in the economy. It causesdistortion in the economic activity. Once money is neutralized, there is no cyclicalfluctuation, inflation, no deflation and no trade cycles.Stability in the exchange rate: Maintaining a stable exchange rate is one of the primaryobjectives of monetary policy. Volatile exchange rate leads to instability in the external sectorand affects the domestic economy as well. Whenever there is instability in exchange rateleading to disequilibrium in Balance of payment then central bank stands to adjust theexchange rate (Walsh, 2017).. Stability in the price level: This is the main objective of monetary policy. The central bankadjusts money supply in the economy to stabilize price level. At time of inflation it follows atight monetary policy while at times of deflation it follows an expansionary monetary policy. Achieve full employment: The objective of full employment needs support from themonetary Authority. The monetary authority aims at bringing equilibrium between savingsand investment at the level of full employment. Economic Growth: Monetary policy supports sustained economic growth in terms ofmaintaining equilibrium between money demand and production capacity of the economy. Itfurther creates conditions favourable for saving and investment to boost growth objective(economicsdiscussion.net, 2017). Main functions of Reserve Bank of AustraliaReserve Bank of Australia (RBA) is the central bank of Australia. Main functions ofRBA are as follows Maintain stability in the currency of Australia
4ECONOMIC ASSIGNMENTKeeping the economy of Australia at full employment levelLook after the prosperity and welfare of Australian people. Since 20 year from now, RBA has maintained it commitment towards achieving amedium term inflation target. It aims to maintain inflation in consumer prices in between therange of 2 to 3 percent (Pagan & Wilcox, 2015). Apart from designing monetary policy, RBAperforms other functions as well.It promotes general balance or stability of Australian financial system.Maintains foreign exchange reservesOffers banking services and facilities to the government and official financial institutionoverseas Control operation of high valued payment system in Australia The issuance of Australian bank notes is the responsibility of RBARBA publishes monetary policy statement on quarterly basis. Though it does notdirectly set interest rate prevailing in the economy, it makes its contribution in determininginterest rate through its operation in money markets. Economic relation of Australia with China and USASince the China’s growth phase starting in 1970, Australia has taken the position tomeet growing demand for building materials, manufacturing raw materials, energy demandfor transport and electricity. With this a strong interdependence between the two nations hasestablished. Today, China is considered as one of the largest trading partners of Australia interms of both export and imports (Heilmann et al., 2014). Domestic market in China providesa large market for Australia’s good and hence, increases demand for resources. However,
5ECONOMIC ASSIGNMENTresource export from Australia to China has slowed down because of supplanting coal withnatural gas. The terms of trade of Australia is likely to be affected as the capacity of iron ore,new coal and gas in Australia and other advanced nations has come on flow. An expectedresult of this is the decline of Australian dollar. China is the largest market for Australianeducation services. Many of the Australian banks and financial institution operates in China.China shows its interest for making investment in Australian infrastructure projects. Like China USA also shares a strong economic relationship with Australia. USA isconsidered as one of the largest and strongest economy in the world. USA is an importantexport market for Australian goods. The nations agreed on a bilateral trade agreement thatbecame effective in 2005 (Starr, 2014). The two nations traded goods billion of worth everyyear and maintain a positive trade balance. Apart from trade relation there are capital flowsfrom both the nations. USA firms operate in Australia offering employment opportunities toAustralian people. Cash rates are the rates at which RBA lends funds to commercial banks. It determinesthe level of economic activity in the nation. In context of strong economic relation andinterdependence of Australia with that of China and USA RBA has to considermacroeconomic indicators in these countries before revising the cash rate or keeping itunchanged. In recent days, the economies of major countries have undergone changes. Forexample, the Chinese economy has experienced a rising growth rate because of expansion ininfrastructure and housing construction. In United States, Federal government has expected toincrease the interest rate. In response to changes undergoing in these major economies, RBAtakes decision regarding the cash rates. Currently, Australian economy has faced a rising trend in exchange rate. The cash ratehas a direct influence on commercial bank’s interest rate. When cash rate is low then loans
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