Macro Economics of the Australian Reserve Bank - Essay Example

Macro Economics Introduction This paper focuses on the ments made to the media by Mr. Glenn Stevens, the Governor of the Australian Reserve Bank concerning the monetary policy decisions by the Reserve Bank of Australia. The statement was issued by the Reserve Bank’s Governor on the 7th of February during a meeting with the organizations Board. The decisions made would enable the monitoring along with control of the monetary and economic conditions so that the country continues experiencing growth that is sustainable and inflation rates that are low. In the article, the Governor makes the observation that the European continent has experienced weak monetary with their future values still appearing to continue falling in the future. The Governor additionally states that other economies around the globe will most likely have a reduction in their GDP’s as well. He also observes that the Chinese economic growth has also been moderated with the monetary conditions within the Asian continent becoming softer. Mr. Stevens also asserts that that the prices for various commodities within the globe have reduced in the recent past despite the fact that most are currently on the rise once more reaching record high values (Stevens, 2012). Therefore, in accordance to the Governor’s sentiments, this paper tries to evaluate whether the monetary decisions made by the Reserve Bank’s Board concerning the weakening economic state in the globe are appropriate to the country and within its mandate. Economic Concepts/ Theories To Be Applied Under the law on the Reserve Bank that was enacted in the year 1959, they are charged with the duty of formulating the country’s monetary policies (Graziani, 2003). This actually involves the act of taking actions so that the interest rates which affects the economic activities in the country. It can be done through ensuring that money is available in the country’s overnight cash markets because they affect other variables like the country’s GDP along with the levels of prices (Arnold, 2008). The law of 1959 additionally stipulates that the country’s goals in their monetary policies will be aimed at employment their whole labor force, ensuring the country’s currency remains stable, the prosperity in the welfare of the citizens financially (Bell, 2004). However, in order to ensure that the country’s currency remains stable their central bank has implemented policies that are aimed at controlling the rates of inflation in the country (Mankiw, 2011). The Australian central bank uses a monetary policy that is referred to as inflation targeting which involves their maintenance of stable but low rates of inflation. This policy has widely been utilized within the country with the belief that it will assist in creating a sounder basis for greater economic growth during the long run periods (Bell, 2004). The country’s Reserve Bank should adopt several policies that range from concepts monitoring their economic growths, business cycles, inflation along with monetary policies and their financial policy regulation. They should also keenly observe the trends within the international economy since they help in showing the direction that capital is currently flowing in (Knoop, 2009). In ensuring that the country’s economy grows, the Reserve Bank should utilize increases in their per capita’s to ensure that they grow in the long run periods. It is for this reason that some countries around the globe are termed as being more successful than others while others grow at similar rates (King, 2011). In evaluating the growth the country is experiencing, the board of the Reserve Bank should examine their investment rates, their population’s growth along with technological changes being experienced (Australia, CCH, 2011). The figures to be utilized can be found through the use of models like the neoclassical along with endogenous models for growth. In monitoring the business cycle within Australia to ensure their economic growth along with low rates of inflation, the Board of the Bank should adopt the Keynesian concepts of economics (King, 2011). Keynes suggested that the aggregate demands for commodities within an economic system when economic downturns occur will be inadequate. This therefore brings forth high levels of unemployment along with losses in their production capabilities (Keynes, 2006). According to the economist Keynes, the Reserve bank should actively introduce policies and other reforms within their public sector so that they can stabilize their business cycle’s output. However, the new Keynesian concepts that have been advanced tend to suggest that the prices of commodities and the wages payable to workers do not automatically adjust to the changes that occur within their economy (Tatjana, 2010). Thus, the board should be very careful when implementing policies that could affect their economy. Subsequently, a direct relationship exists between the nominal values of the output a country produces, the entire money that has been supplied into the market and the levels of prices within their markets (Knoop, 2009). This therefore implies that the Reserve Bank’s board involvement in the creation of monetary policies is a vital aspect of their implementation. The board should additionally be adequately involved in the formulation and regulation of the financial policies that will be used in the country (Graziani, 2003). This move will help in averting any slow economic growths or high rates of inflation that could in turn affect the output of their business cycles (King, 2011). Through a nationalized product accounting methodology, the board can be able to track their economy’s performance and the operations occurring within their business cycles for longer periods of time (Knoop, 2009). The in depth analysis of international economies by the Board of the Reserve Bank would further enable them to evaluate the distribution along with size of the gains other countries are making from their trading activities. This would help them in applying the most applicable changes in quotas along with tariffs to enable them maximize their country’s benefits (Australia CCH, 2011). The main economic theory that the Board of the Reserve Bank should adopt when implementing their economic along with monetary policies is the Keynesian Theory. This theory usually focuses on the main determinants of a country’s national income during the short run periods when there is relative inflexibility in the prices of commodities. According to the author Keynes in his book, ‘The General Theory of Employment, Interest and Money’, the high levels of unemployment within an economy may not be self-corrected within the system. This is because of the low demands that might be experienced despite the presence of the flexibility in prices along with their monetary policies (Keynes, 2006). The Australian central bank’s board should carry out a benefits and costs analysis on their monetary policies before they can be implemented. This move will help the Reserve Bank in ensuring that they get their money’s equivalent in terms of the returns they reap from (Arnold, 2008). The figure below illustrates the average Keynesian supply curves that should be utilized in determining the quantity of money to supply. The horizontal region represents a drop in demand that eventually results in a decrease in the country’s real production since the prices are all constant. The vertical region on the other hand, represents the resources available for production activities (Keynes, 2006). Analysis According to the article by Mr. Stevens, the Australian economy has had increased unemployment rates with their inflation levels decreasing. The prices of food within the country have risen due to the floods that were previously witnessed with their rates of inflation expected to range between two to three percent. The growth of their credit sectors remained modest, with little increases in their demands being witnessed. Their housing prices were also seen to be stable despite the fact that they had previously greatly reduced. On the other hand, their rates of exchange had increased though their trade terms were on the decline. This decline was attributed to the decline that was being witnessed in the world market concerning the euro’s drop (Stevens, 2012). The demand along with supplies of money within the Australian market influences the levels of prices and the real GDP’s of the country (Graziani, 2003). These happenings can best be illustrated using the demand curve, which slopes downwards, in showing the inverse relationships that exist between the rates of interest in the country and the amounts of money that are demanded (King, 2011).Their money’s demand usually shifts when there are real changes in the country’s GDP or their price levels. On the other hand, the money’s supply is controlled by their Reserve Bank (Arnold, 2008). The Bank uses their open market activities which involves the purchasing and selling of monetary securities to affect their overnight rates of interest (King, 2011). Illustration (Demand & supply curves) Price (A$) S D D S Quantity Demanded The diagram shows the demand curve, D-D and the supply curve, S-S. They are shown against their prices and Quantities demanded whereas the Point E indicates the Equilibrium prices. Aggregate demand Curves. The aggregate demands curves of a country like Australia slopes downwards and represents the entire demand for the goods produced within Australia over certain time durations. The aggregate demand curves are plotted against the price levels being experienced in a country and their national output or incomes. Aggregate supply curves. The above aggregate supply curves indicate the expansions of the Australian national outputs and their contraction at points P3 & P1 respectively. The supply curve is plotted against the inflation rates being experienced in the country and the country’s real national incomes. In order for the rate of interests to be perfectly elastic within the current rates their citizens entire savings must be equal to the total values of the investments that have been made. The interactions that exist between the creditors and borrowers within the country are used in the determination of the interest rates being charged in their markets (Knoop, 2009). In case the Board utilizes a monetary policy that is expansionary, it will be able to achieve low rates of interest while increasing the consumption, investment activities along with their net exports (Graziani, 2003). Due to their increased spending, the country’s aggregate demand curves will shift more to the right than expected. This will therefore imply that they will experience a drop in their country’s GDP and inflation rates in the absence of monetary policies (Tatjana, 2010). The Australian equilibrium in the money markets is adjusted to the required levels by the Reserve Bank ensuring that their money’s supply curve is always horizontal to their current rates of interest. These results have been achieved through the Banks adjustments of their financial systems (Arnold, 2008). Finally, the Australian Reserve Bank board should avoid external borrowings since they tend to increase the equilibrium rates of interest, which further results in increases in the amounts of savings along with investments (King, 2011). As soon as the country’s budget starts reflecting a deficit, the supply of finances that have been loaned to the Australian government starts shifting towards the left. This increases the equilibrium interest rates making their savings along with investments to drop (Graziani, 2003). Conclusion The monetary decisions made by the Australian Reserve Bank can thus be said to be appropriate when considering the monetary conditions that are being witnessed around the globe. According to the law of 1959, the Reserve Bank has been mandated with the power of formulating monetary policies that affect the country’s economy (Arnold, 2008). References Augusto Graziani, The Monetary Theory Of Production, (Cambridge: Cambridge University Press, 2003). Australia, CCH Australia Ltd, Australian Corporations & Securities Legislation 2011, Related Regulations, (Sydney: CCH Australian Ltd, 2011). John Maynard Keynes, The General Theory Of Employment, Interest And Money, (Washington: Atlantic Publishers, 2006). Kant Tatjana, Post Keynesian Methodology: Development And Characteristics Of Post Keynesianism, (New York: GRIN Verlag, 2010). “Monetary Policy Decision”, Glenn Stevens, Accessed on the 7th of February, 2012. http://www.rba.gov.au/media-releases/2012/mr-12-02.html N. Gregory Mankiw, Principles Of Economics, (London: Cengage Learning, 2011). Roger A. Arnold, Economics, (London: Cengage Learning, 2008). Stephen Bell, Australia’s Money Mandarins: The Reserve Bank And The Politics Of Money, (Cambridge: Cambridge University Press, 2004). Stephen King et al., Principles Of Economics, (London: Cengage Learning, 2011). Todd A. Knoop, Recessions And Depressions: Understanding Business Cycles,(New York: ABC- CLIO, 2009). Read More