Introduction to Macroeconomics - Assignment

Macroeconomics

Table of Contents
MAIN BODY...................................................................................................................................1
a. Prevailing equilibrium level of interest rate and output of the Australian economy..............1
b. Short run effects of the collapse of the resources boom on the Australian economy.............2
c. Short run policies to counter the adverse effects.....................................................................6
d. Impact of inaction on Australian economy.............................................................................8
REFERENCES..............................................................................................................................10

MAIN BODY
a. Prevailing equilibrium level of interest rate and output of the Australian economy
Australia is currently (2018) operating at both internal and external balance. Inflation is
tracking around 1.9 per cent per annum which is within the RBA’s inflation rate target of 2‐3 per
cent per annum. The unemployment rate is around 5.5 per cent per annum which is close to the
trend rate of unemployment. The official cash rate has remained constant at 1.5 per cent since
August of 2016. the resources boom crash in 2019 due to an abrupt fall in demand in the rest of
the world.
Due to increase in prices and Stable rate of interest recorded in last year is 1.5% and
inflated up-to 1.9% . In recent years target interest rate(short term) have declined to zero and
cannot go further downwards (nominal interest rates for the most part cannot be negative). Hence
interest rate can't decline and equilibrium interest rate remains positive . However fiscal policy
can increase output which cause monetary policy becomes ineffective (Agénor and Montiel,
2015).
The IS-LM (Investment Saving– Liquidity Preference Money Supply) model is a
macroeconomic model that graphically represents two intersecting curves. The
investment/saving (IS) curve is a variation of the income-expenditure model incorporating
market interest rates (demand), while the liquidity preference/money supply equilibrium (LM)
curve represents the amount of money available for investing (supply) .the IS-LM model has
been one of the main tools for macroeconomic teaching and policy analysis. The IS-LM model
describes the aggregate demand of the economy using the relationship between output and
interest rates. In a closed economy, in the goods market, a rise in interest rate reduces aggregate
demand, usually investment demand and/or demand for consumer durables. This lowers the level
of output and results in equating the quantity demanded with the quantity produced. This
condition is equal to the condition that planned investment equals saving. The negative
relationship between interest rate and output is known as the IS curve.
1

Y IS1 LM2 LM1
interest rate i2 a1
i1 a
IS1
0 X
Aggregate output
Above figure, In a closed economy, in the goods market, a rise in interest rate reduces
aggregate demand, usually investment demand . This lowers the level of output and results in
equating the quantity demanded with the quantity produced. This condition is equal to the
condition that planned investment equals saving. The negative relationship between interest rate
and output is known as the IS curve, LM curve shifts towards left due fall in output level (Borio,
2014).
b. Short run effects of the collapse of the resources boom on the Australian economy
The sudden rise in the prices of natural resources in Australia and the related conceived
increase in Australian founded capability to provide primal commodities is one of the huge
economic boom in Australia's history. It begun in 2003 when there is high demand of iron and
coal in market and the prices started rising. The boom in 2005 was mainly related to the
increased demand of major export commodities of the nation. Consumption of coal and iron is
continuously increasing in Australia, hence the government has to ship large quantity of coal and
iron. The rise in demand has been impelled in large part by speedy growth of central emergent
market economies. The rise in demand has also stretched the world wide capacity of suppliers
(Brunnermeier, Eisenbach and Sannikov, 2012).
The prices of Australian mining is increasing continuously, and its has also increased the
investment of mining sector in GDP of the nation. The mining boom is the largest shock to the
economy of the country. This boom has considerably increased the living standard of country. It
has increased per capital household disposable income and real wages and decreased
2