The Business Cycle, Inflation and Unemployment - Example

The Business Cycle, Inflation and Unemployment Name: Tutor: Subject: Date: Tables of Contents  Introduction 3 Economic Growth and Inflation Policies in Africa 6 Australian Business Cycle Theories 7 a)The natural rate of output: classical business cycles 7 b)Under-consumption and stagnation: Keynesian business cycles 8 c)Intertemporal mismatch: Austrian boom-bust cycles 8 Economic Concerns Hold by the Reserve Bank of Australia (RBA) 9 Monetary Policy Measures Undertaken by RBA 10 a)Open Market Operations 10 b)Discount Rate 10 c)Reserve Requirements 10 Conclusion 11 References 11  Introduction Australia has adopted various regulatory reforms that are useful in measuring and improving the global economic rating. The primary policies are utilized in tackling issues affecting trade regulations, international trade, imports and exports of good, and the liberation. Despite the global crunch, Australia has been able to maintain its economy because of these policies. The relevant monetary authorities formulated the sound monetary and fiscal policies so that they can use together with policies that are governing global operation to boost the Australian economy. For instance, there are policies that have been put in place so that they can eliminate all the trade barriers have facilitated an increase in trade. The Australian population is aging at higher rates. This has been a challenge to the government. It is, therefore, essential for the government to develop policies that are likely to improve the macroeconomic stability. These policies are universal as they address across all the economic problems such as inflation, unemployment and the economic growth. Australia is at a risk state because the macroeconomic uncertainty that is gradually affecting the global economy is currently finding its place in the Australian economy. The phenomenon is affecting the private And public sectors. This has been a big issue for the managers of these public and private sectors. In order to achieve the economic stability, it is essential for the managers and those who are responsible in the implementation process to implement the formulated policies. Australian as a country has made a vital progress on the formulation and the implementation of the economic policies. This has made it possible for the country to sustain its economic stability and boosting economic growth. The economic determinant such as inflation has been affecting the economic condition of Australia. This essay reflects the inflation, economic, unemployment rate that is shown in the appendix. The essay analyses economical on matters such as microeconomics inflation, unemployment, stability and the growth policies that are used to restore he economy. Economic Growth and Inflation Policies in Africa According to the national economic survey, the Australian economy is outstanding. This report indicates that the Australian economy was performing despite the global economic crisis. Some of the efficient tools that have boosted the economy include the sound fiscal and monetary policies. According Afonso (2012), adoption of the monetary and fiscal policies are the main tools that are used to curb the rising inflation in the country. In order to contain inflation in an economy, it is always essential for the Central Bank to reduce the amount of cash within public. The excess cash that in the hands of the public can be reduced by use of monetary policies. On the other hand, the government can attain it inflation level through the application of fiscal policy. Inflation has never been good for any economy in the world. According Forrester (2013), inflation is a state whereby money in an economy is chasing fewer goods, and has a result; the rise in prices in such economy is witnessed. Australian Business Cycle Theories In order to understand economic regime of Australia, it is essential to analyze the three main theoretical strands of the business cycle. The Classical and Keynesian theoretical approaches had different views on the functioning of the economy, and how it will affect the business cycle (Velázquez and Smith, 2013). However, the Austrian capital-based macroeconomics combines the two different economics approaches. These elements include: a) The natural rate of output: classical business cycles In the classical economy (check the diagram in appendix one), it is evidence that the Australian markets are always because the prices are flexible. According to Debelle (2013), the Australian economy has always operated under the production possibility frontier. This has enabled the Australian economy to operate as usual regardless of the existing animal shriek. This is essential because the neutrality of the money will have small impact regardless of whether it is short or long run. However, there is a possibility that the Australian production possibility frontier might fluctuate because of the technological shocks and shocks to the preferences of the consumer. There are real shocks in the market that are likely to affect the economy of Australian. The shocks which comprised of technological shock (innovation, oil prices, etc.) are likely to displace the production possibility frontier. This might greatly affect the equilibrium production path of the Australian economy. Contrariwise, the change in customer preference might result to unique behavior such as increase in savings and a decrease in expenditure. This will definitely affect the production possibility frontier. b) Under-consumption and stagnation: Keynesian business cycles In Keynesian approaches, the economy is in general as opposed to classical whereby the economy is represented on the production possibility frontier. According to this theory, the economy will only suffer in case there is existence of chronic lack of aggregate demand. The entrepreneurs will face various challenges that are caused by the lack of demand. The result of this is a layoff. No employment. This phenomenon is not common in Australia though it is something happening in developing economies. Some economies might fail to reach the market clearing level because of the prices and wage rigidities. This will mean that the economy will remain to be permanently semi-depressed state. In such situations, the economy will obtain it rents through the economic agent on the short side of the market. The economic policy will, therefore, depend on the effects of the monetary policy in place. c) Intertemporal mismatch: Austrian boom-bust cycles According to Stevens (2012), the Australian approaches on the business cycle has a great impact on the entire economy. When there is deviation on the production possibility frontier, it affects the allocation of the resources in the country. The miss allocation of resources will arise when deciding the resource that will allocate for the capital goods and for the consumer goods. A move along the production possibility frontier can result to a long term problem that can affect the economy and can even make it impossible for the government to intervene. The equilibrium between savings and investments are an essential factor for determining the preferences of the various customers willing to consume today and those willing to consume tomorrow. Production potential and capacity does not reflect the future consumption or savings in an economy. This can affect the economy because it causes intertemporal change in the prices therefore, raising the interest rates and soothing a recession. Economic Concerns Hold by the Reserve Bank of Australia (RBA) The reserve bank of Australia is much concern on the nature and the state of the economy. At the moment, there is a global slowdown in growth because of the euro zone debt crisis. The Australian central bank has decided to cut the key cash rate by 25 basis points to 4.25 percent. This is because the central bank lacks confidence in the ability of the euro-zone policy to reverse the trend (Tellez, 2013). RBA Governor Glenn Stevens said that the financial condition is difficult and the precautionary behavior by the firms is a clear indicator that the economic growth is slower. Another concern for the reserve bank of Australia is the reduction of the China’s banks’ reserve requirements. This is signs of danger on the global economy. China is one of the biggest trading partner of Australia and, therefore, the slowdown will definitely affect the Australian exports to China. Monetary Policy Measures Undertaken by RBA The Australian central bank uses various monetary policies to restore the economy. Some of these policies include the following. 1. Open market operations 2. Discount rate 3. Reserve requirements a) Open Market Operations Open market operations are essential tools for controlling the amount of money in circulation. The Australian central banks are controlling the amount of money in circulation through selling or buying government securities (Bech at al, 2012). When there is excess circulation of money within the public, government securities are sold to the public. On the other hand, when there is no money in the market, government buys them. b) Discount Rate This is the rate of lending money to the public by the commercial banks. The rate is usually decided by the reserve bank of Australia depending on the economic situation. c) Reserve Requirements This is the condition of the central bank of Australia. They dictate the amount of money that need to be deposited in the reserve bank of Australia. This affects the lending ability of the commercial banks. When the central bank increase the reserve requirement, the ability of commercial bank lending is affected. This forces the banks to avoid lending to the public. Conclusion It is evidence that the Australia has done remarkably well in boosting the economy despite the global financial crunch. The monetary authorities have done well in controlling and improving the economy. This has been beneficial to the entire country because it has reduced the rate of unemployment. The monetary policies implemented have played a key role in keeping the inflation rate and the interest rates. References Afonso, A., & Sousa, R. M. (2012). The macroeconomic effects of fiscal policy. Applied Economics, 44 (34), 4439-4454. Forrester, J. W. (2013). Economic theory for the new millennium (2003).System Dynamics Review. Debelle, G. (2013). Macroeconomics at the Melbourne Institute. Australian Economic Review, 46(2), 223-226. Velázquez, A. M., & Smith, P. N. (2013). Equity Returns and the Business Cycle: The Role of Supply and Demand Shocks. Available at SSRN 2265674. Stevens, G. (2012). Reserve Bank of Australia. Education, 9, 4-0. Bech, M., Gambacorta, L., & Kharroubi, E. (2012). Monetary policy in a downturn: are financial crises special?. Born, B., Ehrmann, M., & Fratzscher, M. (2013). Central bank communication on financial stability. The Economic Journal. Tellez, E. (2013). Mapping the Australian Banking System Network. RBA Bulletin, 45-54. Read More