RBA Decrease Rates for Christmas - Essay Example

?RBA Decrease Rates for Christmas Introduction The mortgage sector is a fundamental component of any given economy. Australian economy is no exception. The Reserve Bank of Australia favored the Australian mortgage holders towards the end of the year 2011. RBA reduced mortgage related interest rates by up to 0.25% in two consecutive months. The Central Bank had its contribution into the matter due to the fact that it had undertaken a cash rate cut in the economy. The central Bank started undertaking this action back in the first quarter of the year 2009. These actions saved the average mortgage holders a significant cost of mortgage access spread over the standard mortgage period of 25 years. The economy is made up of various components and each and every single component affects the economy differently. In the explanation and analysis of the “RBA Decrease Rates for Christmas” article, a number of economic components are considered. These components aid intensive analysis of the article based on the context of actions taken by the RBA, Central Bank and the economic responses experienced in the financial markets and the economy at large. Aggregate demand and supply plays a central role in the economy, determining the overall level of performance of the economy1. Unemployment and inflation are key determinants of the direction that the economy takes and they both affect decisions made within the economic context. Monetary policy on the other hand is undertaken by the Central Bank as a measure to manage the economy alongside fiscal policy. The two measures are crucial in managing currency trends that further determine the level of inflation in the economy. Analysis in the Context of Economic Concepts/Theories Aggregate demand and Supply The economic model is made of different sectors and industries. Each constituent sector or industry contributes towards the overall welfare of the economy. Aggregate demand and supply denotes the entire economy’s output. In other words, it is a national production representation that combines all output of the industries in the economy. Aggregate demand-Aggregate supply interaction is an important aspect of this paper’s analysis. Aggregate demand curve is negatively sloped. The implication of this factor is that given a nominal income, more real goods can be purchased at lower prices, contrary to what would the case at higher process2. Aggregate demand brings on board total spending in the economy. The different levels of spending in the economy are made up of consumption, investment, government purchases and net exports3. The aggregate supply curve comprises of an inflationary and a non-inflationary region. This factor provides a basic principle for the required analysis in this paper. Different factors affect both aggregate demand and aggregate supply. However the interaction of the two is critical to any given analysis in the economy. National output can be either nominal or real, depending on the price base used in their computation. Where more stable prices are used to compute national output given an identified base year, real national output is computed. On the other hand, where current prices are used, nominal national output is computed. Real GDP is obtained when the aggregate demand and aggregate supply interact. On the same point, the resultant equilibrium results in the national inflation rate4. The figure below shows an aggregate demand-aggregate supply model: A number of factors affect both aggregate demand and aggregate supply. Only the factors that are important to this analysis will be highlighted. Income, wealth, credit availability, government demand, investment and future expectations on inflation, income, wealth and interest rates causes the aggregate demand curve to shift to the right upon an increase in any of them. An increase in some other factors causes the aggregate demand curve to shift leftwards. These are: interest rates and taxation. On the other hand, a rightward shift is observed on the aggregate supply when prior investment, productivity and credit availability are increased. The opposite is experienced when there is an increase in costs, interest rates and foreign supply5. These provisions lays down the basis upon which the RBA, the Central Bank and the economic decision making units in Australia based on their decisions about the mortgage sector in the country. Unemployment and Inflation Unemployment constitutes that labor force that is willing and able to work but cannot find employment opportunities. There are different types of unemployment, but whatever the case, unemployment is a critical factor in the economy. A closely related factor in the economy is inflation. Inflation denotes an increase in the general price level in the economy. The relationship between the two are crucial to consider in the explanation and analysis of the article dealt with in this paper. An inverse relation is said to characterize unemployment and inflation6. An increase in one of the two result to a decrease in the other and vice versa. This relationship is depicted by the use of a Phillip’s curve: Today’s macroeconomic trends are characterized by both inflation and unemployment. Economic hardships have become consistent in the current global trends, thereby necessitating critical analysis of these trends so as to provide and undertake prior actions that are tailored towards improving the economic welfare. The article of interest in this paper can be integrated into the actions and activities that characterize both unemployment and inflation. Unemployment increases dependency ratio in the economy since the ratio of the working in relation to the unemployed does not match up. Inflation on the other hand leads to an unfavorable price level in the economy. Prices of both products and services go up. This effect is further spread to the international business of exports and imports. Inflation affects interest rated in the economy due to the adverse effects felt in the foreign exchange markets when dealing with international currencies7. This fundamental consideration cannot be left out in the dealings of RBA and the Australian Central Bank. This consideration is not only important for Australia, but also for the close business allies of the Australian economy. The European and Asian economies have had their effects on the Australian economic welfare and business performance of the Australian firms, industries and business enterprises. Taking a specific consideration of the mortgage sector as provided for the article, aspects of inflation and unemployment must be brought on board when making decisions that pertain to interest rate and cash rate cuts. The idea of favoring or making the mortgage sector better off is not static. A number of economic variables can be integrated into this analysis in the context of inflation and unemployment, and further be explained using diagram(s). The above diagram shows a typical Australian unemployment-inflation relationship. It denotes a series of events up to the year 2005. Today, the situation has not changed much from that experienced in the year 2005. Inflation and unemployment occur from time to time, and sometimes already experienced scenarios are repetitive8. Inflation and unemployment trade off can be presented in form of a diagram. This is given below: Factor combination of the above scenarios can assess the significance of RBA in taking the action presented in the article. However, the expectation in the actual economic context is not certain because different economic units and variables react differently to the actions and decisions made by the policy makers. Monetary Policy This is one of the tools for the purposes of economic influence. This function is undertaken by an authorized central body, in most case the Central Bank of a country. The government through the central bank has the authority to control demand and supply of money in the economy9. Governments undertake have several objectives to achieve in the economy. There are social, political and economic objectives set to be achieved. The economic welfare of any given nation is fundamental in the achievement of all the other set objectives. Basically, the aim of monetary policy is the achievement of macroeconomic stability. For this to be achieved, a number of factors must be maintained at desired levels. Unemployment level should be low, general price level should be stable and consistent, dynamic growth and development in the economy and a balanced BOP. RBA has a role to play to in this. In this regard, the decisions it made on the Australian mortgage sector is a measure that leads to the achievement of the goals of monetary policy. Reducing interest rates and the cash rates triggered an increased investment level in the economy. This was further favored by the reduced cost of borrowing, leading to credit growth towards the end of the year 2011. Policy making and implementation is tailored towards fostering sustainable growth, counter inflation and reduce unemployment in the economy to a desired level10. Conclusion The mortgage sector like any other sector in the economy contributes to the overall welfare and performance of the economy. This sector calls for proper funding, control and regulation in order to realize all round results of having the sector in place. Due to the financial diversity and dynamism that is required in this sector, economic variables touched by the sector should critically be dealt with. It is a sector that is highly sensitive to financial markets movements. GDP, inflation and monetary policy are crucial variables considered in the RBA article. Changes in interest rates due to the actions taken by the RBA and the Central bank in the context of the identified variables aided the above explanation and analysis of the RBA article. Works Cited Berentsen, A., G. Rocheteau and S. Shi, 2006, Friedman meets Hosios: Efficiency in Search models of Money, Economic Journal., Forthcoming. Blanchard, O. J. and J. Wolfers, 2000, The role of shocks and institutions in the rise of European unemployment, the aggregate evidence. Economic Journal, 110, pp. C1-C33. Cahuc, P. and A. Zylberberg, 2004, Labor Economics, MIT Press. Cooley, T. and V. Quadrini, 1999, A Neoclassical Model of the Phillips Curve Relation, Journal of Monetary Economics, 44, 165-193. Cooley, T. and V. Quadrini, 2004, Optimal Monetary Policy in a Phillips Curve World, Journal of Economic Theory, 118(2), 174-208. Lagos, R. and Wright, R., 2005, A Unified Framework for Monetary Policy and Policy Analysis, Journal of Political Economy, 113, 463-484. Petrongolo, B. and Pissarides, C. A., 2001, .Looking into the black box: A survey of the matching function. Journal of Economic Literature, 39, 390-431. Pissarides, C. A. G. Vallanti, 2005, The impact of TFP Growth on Steady-State Unemployment, LSE working paper. Rocheteau, G. and R. Wright, 2005, Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium, Econometrica, 73(1), 175-202. Rupert, P., Schindler, M., Shevchenko, A. and Wright, R., 2000, .The search-theoretic approach to Monetary Economics: A Primer, Mimeo University of Pennsylvania http://www.ssc.upenn.edu/~rwright/courses/rssw.pdf. Read More