University Economics Assignment: Article Review of RBA's Policies

This report provides a critical review of a Sydney Morning Herald article discussing the Reserve Bank of Australia's (RBA) policies to stimulate economic growth. The student analyzes the RBA's call for government support through fiscal policies, particularly in response to a slowing Australian econ...Read More

Running head: ARTICLE REVIEW
Article Review
Name of the Student
Name of the University
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Introduction
This essay aims to critically review the news article on 3rd July, 2019 on Sydney Morning
Herald. The name of the article is “RBA calls on government to do more to boost economy”.
The focus of the essay is to discuss the various economic aspects of the article and relate it to the
relevant theories of macroeconomics and microeconomics. The concerned article mainly
discusses about the economic policies that Reserve Bank of Australia (RBA) take to boost the
economic growth of Australia.
Critical review of the article
The article moves around the statement of the RBA Governor Philip Lowe-“not rely on
monetary policy alone”. RBA cuts the interest rate by 0.25 points to 1 percent (Bagshaw and
Wright 2019). The rate is said to be the one of the lowest interest rate fixed by any central bank
of a country. The cut in interest rate is done under the monetary policy by RBA (Auclert 2019).
As per the article, the Dr. Lowe has asked the government of Australia to support the monetary
policy taken by the RBA with suitable implementation of fiscal policies. The objective of the
policy of the RBA is to lower the unemployment rate and an in increase wage growth (Mucuk,
Edirneligil, and Gerçeker 2017). The economy of Australia is suffering from a slowdown. The
households are consuming less and thus inventory pressure on the economy is piling up. Poor
trade relationship between US and China has been impacting the business sector adversely and
causes business confidence to fall. Consequently, many investors are not spending enough
capital and sitting idle. Hence, this is the time for the RBA and the government for Australia to
act. Hence, the Dr. Lowe urged the government to take fiscal policy measures and reduce tax rate
to boost the economy. The current unemployment of Australia was 5.2% then as per the article.
Dr. Lowe was of the belief that the unemployment rate should decline to 4.5% or less. According

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to him to boost the economy of the country, low unemployment rate is necessary. The concern
raised by Dr. Lowe regarding the slowdown in the economy was convincing as the economic
growth rate was low. Dr. Lowe was afraid that the cut in interest rate would not be sufficient to
generate the required amount of catalytic effect to boost economy in a way that both employment
rate and wages rise. Hence, the tax cut rate policy seems to be supportive enough to generate the
power to boost the economy to the required level. The argument of Dr. Lowe regarding use of
interest cut and tax cut policy concurrently is valid as using both would have neutralizing effect
on inflation. This is because rise in inflation due to tax cut would be nullified by fall in inflation
due to cut in interest rate and keep the inflation rate under control.
The model of aggregate demand (AD) and aggregate supply (AS) under the theory of
macroeconomics explains the policies used in the article best (Gaspar 2018). The policies about
which the article discussed are monetary policy and fiscal policy. The monetary and fiscal
policies are used to impact the macroeconomic factors that ultimately impact the economy of the
country and influences the economic growth of a country (Borio and Zabai 2018). Hence, in the
article it can be observed that the objective of the policies taken by the RBA was to influence the
unemployment and wages. Both wages and unemployment are macroeconomic factors that have
direct effect on the economy of the country. The article showed that during slowdown in
economy it is feasible to use monetary policy and fiscal policy to pull the economy out of the
adverse condition. Hence, from the contextual ground the article is completely relevant.
The policy used by the RBA to improve the economic condition of Australia is
expansionary monetary policy. These policies are used to increase the money supply such that
the aggregate demand increase due to increased consumption that further caused due to rise in
disposable income (Ndou and Mokoena 2019). On the other hand, the cut is tax rate is an

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expansionary fiscal policy is used to increase the money supply in the economy (Hsing 2019).
Both the policies mentioned above have the same effect on the economy. However, the cut
interest rate impact the economy from the supply side as with lower interest rate there will be
more loan and thus more investment. This ultimately increase the output, employment and wage
rate in the economy. Alternatively, cut in tax rate increases the disposable income of the
individuals directly as they have to pay lower tax. Hence, both the policies increases both AD
and AS cause the respective curve to shift outward and causes the output of the economy to
grow. The graphical illustration of the effect of the policies in shown in figure 1.
Figure 1: Effect of expansionary
monetary and fiscal policies
Source: (Created by the Author)
Moreover, it should be noted that other policy tools that can be used to boost the
economy are open market operation under expansionary monetary policy where central banks
buys government securities in the market to increase money supply (Mehra 2017). Alternatively,
in case of expansionary fiscal policy increasing government expenditure is effective for
increasing money supply and boost the economy.

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Bagshaw and Wright have been able to accurately demonstrate expansionary monetary
policy through explaining the effect on lowering interest rates has on people’s borrowing
confidence and increase on AS. He also explains the impact of expansionary fiscal policies, as
more tax cuts are done, more spending will occur and increase the AD.
The article by Bagshaw and Wright is a well written article as it was relatable to the
general public by using simple English elaborated on terms such as monetary policy as cutting
interest rates. However, a graphical representation of how various other public policies in
conjunction with monetary policy would create more economic growth in comparison to just
monetary policy alone, such as the AD-AS curve would have further illustrated Philip Lowe’s
argument.
Conclusion
The critical review of the article leads to the inference that the main macroeconomic
theories of expansionary fiscal and monetary policy are important concepts to consider in the
context of the wellbeing of the Australian economy. In addition to that, the concepts and policies
that are taken to improve the economy of Australia undoubtedly effective. However, more policy
discussions and use of other policy tools for the implementation of expansionary monetary and
fiscal policy could be possible to further improve the growth of the Australian economy.

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Reference
Auclert, A., 2019. Monetary policy and the redistribution channel. American Economic
Review, 109(6), pp.2333-67.
Bagshaw, E. and Wright, S., 2019. RBA calls on government to do more to boost economy. The
Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/rba-calls-
on-government-to-do-more-to-boost-economy-20190702-p523dy.html.
Borio, C. and Zabai, A., 2018. Unconventional monetary policies: a re-appraisal. In Research
Handbook on Central Banking. Edward Elgar Publishing.
Gaspar, J.M., 2018. Bridging the gap between economic modelling and simulation: a simple
dynamic aggregate demand-aggregate supply model with Matlab. Journal of Applied
Mathematics, 2018.
Hsing, Y., 2019. Is Expansionary Fiscal and Monetary Policy Effective in Australia?. The
Journal of Business, Economics, and Environmental Studies (JBEES), 9(3), pp.5-9.
Mehra, Y.S., 2017. Study of monetary policy transmission mechanism in developed and
developing countries. Asian Journal of Research in Business Economics and Management, 7(5),
pp.1-18.
Mucuk, M., Edirneligil, A. and Gerçeker, M., 2017. The relationship between unemployment
rate and economic growth: The case of Turkey. Siyaset, Ekonomi ve Yönetim Araştırmaları
Dergisi, 5(1).

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Ndou, E. and Mokoena, T., 2019. Do the Effects of Expansionary Monetary Policy Shocks on
Output Persistence Depend on Inflation Regimes?. In Inequality, Output-Inflation Trade-Off and
Economic Policy Uncertainty (pp. 357-366). Palgrave Macmillan, Cham.