Role of the Reserve Bank of Australia - Essay Example

Table of content Section A-------------------------------------------------------------------------------------2 Introduction The role of the RBA Section B------------------------------------------------------------------------------------4 Introduction Government deficit and the effects to the private local investors Section C-----------------------------------------------------------------------------------7 Introduction The carbon price Measures taken to curb the effects of carbon pricing Conclusion Reference----------------------------------------------------------------------------------10 The role of the Reserve Bank of Australia to the economy Introduction The Reserve Bank of Australia (RBA) was established in the year 1959. The creation was put into place by the reserve bank act 1959. The act lays down the roles of these bank a puts it that this is not a profit acquisition bank. The bank introduction has seen many improvements in the economy of Australian. It has also seen that the market and business of the country getting to have a sense of decency and accountability. The banks major role is to regulate the money or the Australian currency. It is also responsible for the management of other banks. In essence the RBA has a regulatory role in the Australian economy rather than profit making like other banks. The absence of this bank could have seen a scenario was prices of commodities rise insignificantly and no one has control over them. Financial institutions could have also been free to impose any interest rates and totally create a situation of anarchy in the economy. It is then necessary that we keenly look at the role of the RBA in the economy of Australia. The role of the RBA Though the reserve bank can play several other roles there are three major roles that can be sidelined in the study of the functions of the RBA to the economy of Australia. These roles are. 1) Maintaining the stability of the Australian currency 2) Maintenance of employment and 3) Ensuring the economic prosperity of the Australian people. Maintaining the stability of the Australian currency It can be said quite aptly that the most important role of the RBA is the regulation of the monetary policy. The monetary policy is the policy that defines the interest rates the other bank can offer to customers. Interest rates are a significant and basic thing that loaners look at before they can take a lone from the bank. The RBA then plays a very basic role of regulating the availability of money in the economy to be borrowed, these is done by the bank regulating and defining the general cost rate of interest in the whole banking sector. These are ideally achieved through the domestic market operations (RBO). In these case then the bank is responsible for the granting of government securities, these securities are like the treasury notes and also the treasury bonds. These two will directly influence the general interest rate of the banks. Maintenance of employment Unemployment is one key factor in the determination of the economic status of a country. Unemployment is majorly or in most cases high when inflation is high. With the prices of commodities being high and purchase power of citizen being low then a situation presents itself were many employees will not employ more workers or in even other case downsize there labor force. The RBA has a major role of regulating inflation by ensuring that it remains at a very low value. This low inflation is very critical in marginalizing prices in the market and thus the purchase power remains high. These unable more people to get employed and thus in such a case the RBA is playing a very critical role of maintaining employment. Ensuring economic prosperity Finally the RBA has a very major role of developing the economy of Australia. From the roles it plays it ensures that there is stability in the currency of Australia. A stable currency is a very good indicator of economy growth. When the currency is strong against other international currencies then the economy of the country is stable, the RBA is then responsible for the regulation of the currency and how it fairs. This is done by regulating the monitory policy of the country. This monetary policy is responsible for the determination of how the currency fairs in the market. Section b Government deficit and the effects to the private local investors Introduction Government deficit is the state where the government revenue is lower than its expenditure. In other words it is when the government spends more than it can have (GANS, J.). These state would at most cases represent the reduction in savings from both the public and private sector. In the event of these the country experiences a low amount of funds that can be loaned out. These case presents a scenario were the investment will tend to be significantly low. This investment can be both in the private investors and international investors. But most significantly it will present a very tight situation for the private domestic investors. Private investors depend on the loans offered by the government and financial institution to make investment. The loans are the basic source of capital for these investors. If the case is that the government has a deficit then it would follow that the loanable amount is significantly low. This will mean that this investor’s source of capital will be out of reach and thus they will not be able to invest. In such a case therefore, the private investment will significantly reduce and eventually the private investment will be crowded out (Top of Form LAYTON, A. P: 400). Another case worth mentioning is the increase in the interest rates. When the government experiences a deficit, there is quite an effect to the economy that the interest rates will tent to go high. This has a very direct effect to the domestic investors. As we had mentioned earlier investors depend so much on the loans offered by government through banks. If the interest rates are high then it would be quite difficult for the investors to make borrowings from the banks, and this has quite an effect to the rate of investment. It is expected that from such high interest rates the domestic investment will greatly reduce and eventually it would be crowded out. This effect on the amount loanable cash availability has a direct impact not only to the investment but also to the foreign investment. This case increases foreign investment since they take advantage of the high interest. As such, it denies a change for the growth of local investors and in doing so then their general life is affect. This is so, because the rate of employment will be low coupled by the low purchase power for the Australian people. These will totally affect the life stands of the general society of the country since it will increase the poverty levels. A better explanation of the scenario is offered in the table below. The figures describe the relationship between the supply of loans, foreign investment and the local investments. In this case the demand of the loan is high due to the high interest rates. This makes the Australian local investors being unable to meet this high demand. The event of this favors foreign investors who take advantage of the high interest rate and thus there invest anent increases instead of the local investment Section c Introduction The increase of environmental pollution has seen the introduction of one of the fiscal policy of carbon pricing in Australia. The carbon pricing was introduced and made functional from July 2012. The pricing is to take effect in the form of tax that is to be put on the emissions of carbon. The pricing is meant to cut the emission of carbon in the Australian environment. These pricing is directed toward the level of carbon in the outputs and the inputs of product from the industry. The tax on carbon will have quite an effect on the macroeconomic environment in the sense that the tax might be passed down to the consumers who are the Australian people. The effect can be felt in the price of commodities. The effects of carbon pricing The Australian society is a very large consumer of electricity. This electricity is mainly produced by the burning of brown coal. The introduction of the carbon pricing as seen from the projection of the economy reveals that the cost of electricity is bound to increase by 26%. In this case, the tax introduced to the carbon emission is at the long run passed to the consumer. The passing on is seen in the eventual increase in the pricing sine the producers are not willing to bear the cost alone, though some preferences are made to shift to other mode of electricity production rather than the coal of burning still the consumer has to bear the burden. The Australian society is expected to see an increase in the prices of electricity (Top of Form STONECASH: 239,). The other major macroeconomic effect that is expected to be witnessed is the pricing of commodities. These will go directly to the household usage of carbon commodities. It s expected that with the introduction of the pricing, the tax levied will eventually have to be passed on to the consumers, and in this case the household by having to increase prices. This has a net effect to the Australian people. Projections are put at 2.6% increase in the price of some major commodities relying on carbon. The consumers are then set to experience these increase ( Garnaut 20) The other field expected to be affected is employment. The tax is expected to have a net impact of 1% reduction of employment. The Australians have for the years experienced a very low rate of unemployment, but with this pricing it is clear that many sectors will have to bear with it, by cutting down their labor force or in other cases changing the modes of production. These changes have to come with some Australian losing their jobs so as to maintaining these cost. Measures to curb these effects The Australian government has tried to come up with different models of introducing the carbon pricing so as to eventually curb the effects that it is expected to bring into the economy. This has been done by the introduction of different models to be used in the application of the taxation. The three models mentioned in this case are the 15% tax, the 23%tax and eventually the 30% tax. The three have different effect to the macroeconomics. So the application will depend on what the government anticipates to the general society and the general protection of the society from inflation. Conclusion It is worth motioning at this instance that, the stake holders and the Australian society have to be involvement in the discussions of the fuel pricing. Though this fuel price has got some very major contribution to the economy caution should be taken not to leave the society to suffer. Some of the major positive effect of this carbon pricing is the reduction of the environmental pollution and also the increase of the tax base of the government. This increase can at the same time be used to caution the citizens against the inflation. Reference Garnaut 2011, Climate Change Review 2011 Update Paper six: Carbon pricing and reducing Australia’s emissions www.garnautreview.org.au Www. Treasury.gov.au http://www.une.edu.au Top of Form STONECASH, R. E. (2011). Principles of macroeconomics. South Melbourne, Vic, Cengage Learning. GANS, J. (2011). Principles of economics. South Melbourne, Vic, Cengage Learning. Top of Form LAYTON, A. P., ROBINSON, T. J. C., & TUCKER, I. B. (2011). Economics for today. South Melbourne, Vic, Cengage Learning. Bottom of Form Bottom of Form Read More