Principles of Economics | Report

Principles of Economics 1
Running Head “Principles of Economics”
Principles of Economics

Principles of Economics 2
Table of Contents
Introduction.................................................................................................................... 2
Question 1..................................................................................................................... 3
Question 2..................................................................................................................... 6
Question 3..................................................................................................................... 8
Question 4................................................................................................................... 10
Question 5................................................................................................................... 13
Conclusion................................................................................................................... 16
References................................................................................................................... 17

Principles of Economics 3
Introduction
This report will provide information about the objectives of the monetary policy and the
functions of the reserve bank of Australia. Along with this, the factors that RBA consider when
taking decision about the cash rate will be discussed in this report. The reason behind the
decision about the unchanged cash rate of RBA will be discussed in this report. In addition to
this, what will be the affect on inflation of increase in cash rate and the affect of decrease in cash
rate on economy will also be discussed in this report. This report will also provide information
about the affect of increase in decrease of cash rate on GDP, Inflation, Housing market,
Consumption demand and business investment. Along with this, this report will also provide
information about the view of student about the unchanged rate of RBA.

Principles of Economics 4
Question 1
Objectives of Monetary Policy:
Monetary policy is a process by which the supply of money controlled by the monetary authority
of a country. The objective of monetary policy is different in every country and it also differ by
time. Following are the objectives of monetary policy:
Stability of Exchange:
This is the traditional objective of monetary policy. In different countries exchange stability was
the main objective under gold standard. Whenever disequilibrium occur in the balance of
payment of a country, this disequilibrium automatically corrected by the movement (Smets,
2014). To increase the foreign investment, developing countries pursue stable exchange. If the
exchange rate is stable, than it will be very beneficial for the international trade.
Price Stability:
This is the most important objective of monetary policy. Monetary policy helps to avoid the price
inflation and deflation and this is leads the price stability. Price stability helps to enhance the
confidence of public because it eliminates the price fluctuation like; inflation and deflation.
Monetary policy ensures that all the income and wealth is distributed equally or not. It promotes
imports and discourages the export.
Full Employment:
Full employment refers to that economic situation where all eligible people who want job can
find the job at a good wages rate. Full employment is not 100% employment. Monetary policy is
mainly concern credit and currency, so the policy regarding credit and currency can overcome
the problem of trade fluctuation in the economy of a country (Ball, et al., 2014). When the
economy of a country face the unemployment problem than the monetary authority can help the