Economics for Managers - RBA and the Threat of Deflation Essay, 2018

This essay, written for an Economics for Managers course, delves into the role of the Reserve Bank of Australia (RBA) in managing the Australian economy, with a specific focus on the threat of deflation. It begins by outlining the RBA's responsibilities, including monetary policy and currency issuance, to foster economic stability and growth. The essay details the tools at the RBA's disposal, such as interest rate adjustments and open market operations, to control inflation, deflation, and recession. It then analyzes the current economic environment in Australia, highlighting factors like inflation, unemployment rates, and investor behavior. The paper further explores the interconnectedness of recession and inflation, and the implications of deflation. Finally, it discusses the concept of leverage in the economy and its impact on Australia's financial landscape. The essay uses data and analysis to present a comprehensive understanding of the RBA's role in navigating the complexities of the Australian economic environment.

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Economics for Manager
Essay
8/30/2018
Student Name

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Executive Structure
The paper aims to have the understanding of Australia and its economic environment, which
is regulated by the Reserve Bank of Australia. In the essay, the areas related to inflation,
deflation and recession of Australia and other countries have been discussed. These have
been discussed to analyze the environment and the policies need to be made by the RBA to
regulate the market without any interruption of the price level in the economy. The factors
leads to the deflation in the country have been discussed. The factors, which affect the
advantage of the economy, have also been discussed in the report.

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Contents
Introduction................................................................................................................................3
Role of RBA...............................................................................................................................3
Tools available at disposal of RBA to carry out its functions....................................................3
Current economic environment in Australia..............................................................................4
Connection between Recession and Inflation............................................................................6
Deflation.....................................................................................................................................7
Leverage in economy.................................................................................................................8
Conclusion..................................................................................................................................8
Bibliography.............................................................................................................................10

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Introduction
The essay discusses the role of Reserve Bank of Australia in the country. The essay discusses
the tools and measures used by the RBA to control and regulate the financial market in the
country. The tools used by the Reserve Bank of Australia at disposal to carry out the function
in the economy. The Reserve Bank of Australia performs the function in order to maintain the
stability in the country, which can contribute, to the development in the country
(Morningstar, 2017). The growth and development of the country is the only aim of the
Reserve Bank of Australia. The measures have been taken by Reserve bank of Australia to
control the inflation, deflation, and recession in the country. The factors, which leads to these
problems arise in the country, has also been discussed in the essay. The other measures
related to the advantage and performance of Australia has been discussed (Tamura, 2014).
Role of RBA
Reserve bank of Australia plays an important role in Australia. Reserve Bank of Australia is
responsible to make the monetary policy in the country so that the flow of money will be
there in the economy. RBA is the issuer of currency in Australia and has the sole authority to
issue the currency in the economy. Reserve Bank of Australia has been established in the
economy to foster the economic stability and promotes the economic growth and
development in the country. This will bring the efficiency in payment system (The balance,
2018).
Tools available at disposal of RBA to carry out its functions
A central bank is an independent national authority that conducts and regulates the
functioning of monetary policy in the country. The central bank uses measures to control the

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financial performance in the country by controlling the outflow and inflow of money and
currency in the country. This can be done by using the monetary tools in the economy. The
Reserve Bank of Australia is using the various tools to achieve the monetary policy goals of
the country (The National Bureau of Economic Research, 2011). Reserve Bank of Australia
wants to achieve the quantitative tools in the economy by managing the bank and discount
rate, reserve requirements of the country (Johnson, 2014).
The country is facing the problem of low interest and inflation rates in the country due to the
ammunition crisis in the country. These crises potentially affect and force the ultra-easy
money policies by making use of the quantitative tools of monetary policies. In these
quantitative tools of monetary policies, changes in the interest rates are done by the central
bank of the country to manage the situations of inflation and deflation in the country (The
National Bureau of Economic Research, 2004).
If Australia is facing the problem of inflation in the country then the reserve bank of Australia
will put the high-interest rate in the country so that the people will take the less loan due to
the high-interest rate ion them. This will make low purchasing power in the market, which
will help in lowering the inflation in the country (Pfitzner, 2014).
There are some other quantitative measures has been used by the Reserve Bank of Australia
which include open market operation. In this tool, the central bank makes the purchase and
sales of government securities, bonds, assets, and yields in the market. At the time of
inflation in the country, RBA starts selling the securities in the market so that the purchasing
power of the country can be taken by the government by giving them the securities. This will
help them to maintain the stability in the country (Reserve Bank of Australia, 2018a).
Current economic environment in Australia

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The current economic environment in Australia is found to be stronger in nature. Australia
has a stronger growth driven economy, which was driven by the increased demand in the
country. This will slow down the unemployment rate in the country. In Australia, the
economy is found to be just one recession away from deflation, inflation. The interest rate in
the country seems to be lower for a period in order to tighten the overall market. In the
market of Australia, RBA Governor Philip Lowe states that the inflation in all the countries
found to be low whereas in Australia it is found to be expected to be increasing gradually.
Wages in the country has been taking a great speed in order to improve the standard of living
in the country. The RBA tries to manage the option, which able to reduce the unemployment
rate in the country (The National Bureau of Economic Research, 2011).
It is predicted by ANZ and NAB that the interest and inflation rates in the country going to be
increased in near future in Australia due to the slow rate of growth in the country. Normally
the average rate of inflation is going to be increased is around 2 to 3 per cent in a year. The
domestic inflation in the country is found to remain below 4% in the Australian market. From
the analysis, it can be understood that the inflation will fluctuate around 2 percent in the next
3 years. However, due to the high competition in the market and focus gave on the financial
stability in Australia and New Zealand, the inflation is getting more concern (Morningstar,
2017).
The scenario of Australia is found to be investor orientated. The inflation, deflation, and
changes in rates of interest are due to the investor playing in the market. They have the
influence over the interest rates in the country indirectly. If Australia is operating in low
inflation then the interest rate in the global market will also be low (Prior, Giurco, Mudd,
Mason and Behrisch, 2012). The rise in the US interest rates depicts downfalls in the
currency of Australian dollar. The economic environment not only affects the inflation and
interest rates in the country but have the capacity to affect the investor implications in the

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market. Due to the high inflation in the market, the currencies of Australia will depreciate in
the market. From the table, it can be analyzed that the rate of unemployment has been
decreasing since the year 2018 to 2020 by providing the opportunities to grow and sustain in
the market for a long period. The growth rate in the country has also found to be increasing in
nature, which helps in increasing the overall consumption and production of the economy
(Reserve Bank of Australia, 2012).
Year-ended
Jun 2018 Dec 2018 Jun 2019 Dec 2019 Jun 2020
Unemployment rate(b) 5.5 5¼ 5¼ 5¼ 5¼
CPI inflation 1.9 2 2¼ 2¼ 2¼
Underlying inflation 1¾ 1¾ 1¾ 2 2
Year Average
2017 2017/18 2018 2018/19 2019
GDP growth 2¼ 2¾ 3 3¼ 3¼
(Source: Reserve Bank of Australia, 2018)
The effect of this economic environment also affects the decision-making by the RESERVE
BANK OF AUSTRALIA and many investors in Australian and other markets. The
implication of these policies is seen in the decision-making by the investors in managing their
assets and portfolios (Reserve Bank of Australia, 2018).
Connection between Recession and Inflation

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For the local people living in the country, normalization of policy has been used. In some bad
cases scenario, the average inflation rate is finding to be below 2 per cent in the economy of
Australia and others. This is just one way to reduce the recession way from the deflation in
the country. Recession can be defined as the downfall of the economy due to the economic
activities performed in the country. On the other hand, the term inflation is general increases
in the price level due to the market. The connection between the inflation and recession can
be understood only by analyzing the economic activity performed in the environment, which
affects the inflation done price level of the country (Reserve Bank of Australia, 2014).
The recession is caused in the economy due to the negative GDP in the country. It is related
to inflation in a manner that the negative GDP reflects that the country production is not
growing or in another way, the prices level in the country is raised to that extent which makes
impossible for the market to purchase the goods and services. In this way, the recession and
inflation are related to each other in Australia. The recession can be aroused due to the high
inflation in the country, war, natural disasters government policies, unemployment and other
natural destructions (Reserve Bank of Australia, 2015).
Deflation
The deflation is found dreaded in the economy as it makes the nominal interest rates not
falling to zero. This would make a reduction in saving of the bank. The general price level in
the economy keeps on decreasing due to the effect on the interest rates in the country. In
comparison to deflation, inflation is found better to have in the country (Rovai, and Downey,
2010). In the time of inflation, the market has the purchasing power to spend on their
consumption and living but in the time of deflation, the general price level goes downwards
to that extent where the people do not have money to spend to fulfill their basic amenities.
This is the reason; inflation is better as compared to deflation in the country (Walshe, 2014)

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One of the best examples can be taken is of the Europe which has faced the high level of
deflation in their country. The other country, which has faced the problem of deflation, is
found in Japan from the year 1998 to 2003. The Bank of Japan was not able to help the
economy to fight against the deflation in the country. The interest rate seemed too high in the
country, which makes the deflation serious and has cost quite high for the country (The
National Bureau of Economic Research, 2004).
Leverage in economy
The leverage can be defined as the capacity of a country to have the ability to take the debt in
the economy. The leverage is taken in the country affect the working and performance of
Australia. The leverage dynamics is considered to be the real burden of debt on the economy
(Woodward, Shulmeister, Bell, Haworth, Jacobsen and Zawadzki, 2014). This concept in the
economy plays an important role in link between the financial and real development. It has
been find out from the research that from the year 1985 to 2013, there are many adverse
impacts had been seen in the economic growth due to the deflation in country. To gain the
advantage in the market, the overall policy framework has been made in such a way, which
can benefit the society and economy overall. The tax system is designed in such a way that
helps to avoid overly rewarding leveraged speculation (Reserve Bank of Australia, 2018b).
Conclusion
From the above discussion, it can be concluded that the analyzing the economic environment
of the country is important to know. Reserve banks of Australia has been analysing the
market and evaluate the policies and monetary tools that need to be used in the country so
that the economic condition can be maintained. This economic maintenance includes the
inflation-deflation and recession I the country. To bring the stability in economy thee three

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measures have to be controlled by the RBA in Australia. Other measures have been taken by
the RBA to bring the stability in the economy, which leads to the growth and development of
the country. The measures have been taken to reduce the effects the inflation, deflation, and
recession in the country.

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Bibliography
Johnson, H.G. (2014) World inflation, the developing countries, and “an integrated
programme for commodities”. PSL Quarterly Review, 29(119).
Morningstar. (2017) Is the deflation bugbear heading Down Under? [Online] Available from:
https://www.morningstar.com.au/stocks/article/Is-the-deflation-bugbear-heading-Down-
Under/8994 [Accessed on: 30th August 2018]
Pfitzner, J. (2014) Facilitating lung collapse during one lung ventilation can be
rational. Anesthesia & Analgesia, 119(4), pp.1002-1003.
Prior, T., Giurco, D., Mudd, G., Mason, L. and Behrisch, J. (2012) Resource depletion, peak
minerals and the implications for sustainable resource management. Global Environmental
Change, 22(3), pp.577-587.
Reserve Bank of Australia. (2012) Functions and Objectives of the Reserve Bank [Online]
Available from: https://www.Reserve bank of
Australia.gov.au/publications/annual-reports/Reserve bank of Australia/2012/functions.html
[Accessed on: 30th August 2018]
Reserve Bank of Australia. (2014) Why Financial Stability Matters, and What We Can Do
About It [Online] Available from: https://www.Reserve bank of
Australia.gov.au/speeches/2014/sp-so-fs-040614.html [Accessed on: 30th August 2018]
Reserve Bank of Australia. (2015) Property Markets and Financial Stability: What We Know
So Far [Online] Available from: https://www.Reserve bank of
Australia.gov.au/speeches/2015/sp-so-2015-09-08.html [Accessed on: 30th August 2018]

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Reserve Bank of Australia. (2018a) About Monetary Policy [Online] Available from:
https://www.Reserve bank of Australia.gov.au/monetary-policy/about.html [Accessed on:
30th August 2018]
Reserve Bank of Australia. (2018b) Our Role [Online] Available from: https://www.Reserve
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Walshe, K. (2014) Archaeological evidence for a sealer's and wallaby hunter's skinning site
on Kangaroo Island, South Australia. The Journal of Island and Coastal Archaeology, 9(1),
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Woodward, C., Shulmeister, J., Bell, D., Haworth, R., Jacobsen, G. and Zawadzki, A. (2014)
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