Applied Economics Report: Monetary and Fiscal Policy in Australia

This report provides an analysis of the Australian economy using the AD/AS model, examining factors like unemployment, inflation, and economic growth from 2010 to 2016. It highlights the impact of falling inflation rates and shifts in the aggregate supply curve on real GDP and discusses the trends in economic growth and unemployment. The report further investigates the influence of monetary and fiscal policies, implemented by the Reserve Bank of Australia and the government, respectively, on the housing market. It explores the effects of interest rates, government expenditure, and immigration on housing prices and the relationship between the housing market and GDP growth. The report references key economic studies to support its analysis, offering insights into the complexities of the Australian economic landscape.

Running head: APPLIED ECONOMICS
Applied Economics
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1APPLIED ECONOMICS
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Reference....................................................................................................................................5

2APPLIED ECONOMICS
Answer 1
The AD/AS model is one of the most reliable tools in economics as it explains the
framework of economic factors in a single picture. The main factors that are discussed in this
theory are unemployment, inflation and economic growth. The Australia’s economic growth
can be explained through this. The AD/AS model explains that the fall in inflation rate shifts
the short run aggregate supply curve and also the long run aggregate supply curve to the right
and which in turn raises the real GDP by lowering the equilibrium point. That means, there is
a right shift of the aggregate supply that indicates the economic growth as the productivity is
increased. The long run supply curve indicates the potential GDP which is the GDP at full
employment which also shifts rightward over the time.
2010 2011 2012 2013 2014 2015 2016
0.056
0.058
0.06
0.062
0.064
0.066
0.068
0.07
0.072
Economic Growth
Economic Growth
Figure 1: Economic growth over the year
The above diagram shows the growth of GDP per capita which is rising over the time.
After the recession of 2008, the unemployment rate was falling from 5.8% in 2010 to below
5% in 2012. In Australia, the unemployment raised by 1.8% over a year in the mid of 2016
which was lower in last 3 decades. This happened because of lower amount of participation
of labour force which was due to long-term demographic trend like ageing of the population
and higher rates of engagement in education by the younger people (Chua & Robinson,
2018). The real wage had been influenced by softening in the labour market and raising the
capacity in the economy. This was due to declining inflationary expectations. However,
growth in wage strengthen the employment growth and reduced the unemployment rate
(Bishop & Cassidy, 2017). The inflation rate in Australia was 2.4% in 2013 and 2014 then in

3APPLIED ECONOMICS
2015 and 2016 it was hovering around 1.4%. That means the inflation rate in those years
were falling.
2010 2011 2012 2013 2014 2015 2016
0.056
0.058
0.06
0.062
0.064
0.066
0.068
0.07
0.072
Economic Growth
Economic Growth
Figure 2: Trend of economic growth
The above diagram presents the trend line for the economic growth of
Australia. The unemployment rate and inflationary pressure in 2016 shows the real gross
domestic product per capita growth at highest point. Both the economic factors were
strengthening the product market of the Australian economy in this period.
Answer 2
The monetary policy is implemented by the central bank of a country. The Reserve
Bank of Australia set cash rate at very low amount due to presence of influence of record
falling interest rate in 2016. The trend of the Australian cash rate was downward sloping in
the given period of 2011 to 2017. The lowest target cash rate was set to 1.25%. In this period,
the inflation was less than the target of Reserve Bank of Australia and the target was 2-3% at
the same time the growth of wage was very slow. The low level of inflation and slow growth
of wage with no influence on the RBA and monetary policy, this may be assigned to low
level of prediction for growth of inflation.
Fiscal policy is mainly implemented by the government. The government of Australia
raised the proportionate expenditure to the GDP and through raising the issuance of AGBs,
results in deficit budget. This raises the interest rate pressure which declines the aggregate
money supply for lending to the housing market. These creates the shortage of cheap money
to the households for lending for housing market.

4APPLIED ECONOMICS
The housing market is directly influenced by the monetary and fiscal policies of
federal budgets. The interest rate influences the rising credit demand and rising credit access
in Australia. The lower interest rate leads to lend more to purchase property and housing. A
weak fiscal policy along with higher government expenditure can raise the aggregate demand
in the housing market and can create upward pressure in the housing market. The rising
demand, government expenditure and immigration raises the price of housing market (Su et
al. 2018). Monetary and fiscal policy recently prevents downward pricing trend in the
housing market in the presence of high government expenditure along with immigration and
weak monetary policy. There exists a positive correlation between housing market and GDP
growth at the time of growing housing market (Keen, 2017). There exist few economic
explanatory variables where if an important sector such as housing market faces a decline
then Australian economy have to face a recession.

5APPLIED ECONOMICS
Reference
Bishop, J., & Cassidy, N. (2017). Insights into low wage growth in Australia. RBA Bulletin,
March, 13-20.
Chua, C. L., & Robinson, T. (2018). Why Has Australian Wages Growth Been So Low? A
Phillips Curve Perspective. Economic Record, 94, 11-32.
Keen, S. (2017). Can we avoid another financial crisis?. John Wiley & Sons.
Su, L., Lin, L., Chen, S., & Li, L. (2018). Effect Analysis of Real Estate Price and Monetary
Policy: An Empirical Study Based on China Macroeconomic Data. Applied Economics and
Finance, 5(2), 158-167.