The Primary Goals of Australian Macroeconomic and Monetary Policy - Assignment Example

Student Name Course Name Tutor Date Question 1 In the last 10-15 years, the economy of Australia has experienced nothing but being reformed positively which has contributed to the boosting of its economy, and sufficiently upgraded the the living standards in Australia. Many contracts have been signed between China and Australia to suppliment energy and raw materials the Australian economy which is among the fastest growing economy in the world. Australia can boost as having among the best living standard in the world and among the G7. Her living standards can only be surpused by those in America. The economic standard ranking is direct result to devotion to implimentation of well refined macro-economic practices and the use of prudence policy where the goverment targets economic cycle to be superseded by fiscal balance (Meredith & Dyster 67-9). The following chart shows a trend of gross domestic product [GDP] of Australia at market prices provided by the International Monetary Fund [IMF] depicting figures in millions of Australian Dollars. Year Gross Domestic Product US Dollar Exchange Inflation Index (2000=100) 1980 140,987 0.87 Australian Dollars 36 1985 245,596 1.42 Australian Dollars 54 1990 407,307 1.27 Australian Dollars 80 1995 500,458 1.34 Australian Dollars 90 2000 669,779 1.71 Australian Dollars 100 2005 926,880 1.30 Australian Dollars 116 2007 1,044,162 1.26 Australian Dollars 122 Australia economy is largely made up of the service sector which claims a share of sixty-eight per cent of Australia Gross Domestic Product. The mining and agricultural sectors which account for ten per cent of the Gross Domestic Product are credited for fifty-seven per cent of Australia export. This fact of dominance of the service can be illustrated in the table below. The table shows percentage share value added, constant prices. 1974 1984 1994 2002 Agriculture 4.4 4.3 3.0 2.7 Manufacturing 18.1 15.2 13.3 11.8 Other industries 14.2 14.0 14.6 14.4 services 63.4 66.4 69.1 71.1 The following table shows Per capita GDP, annual average rate of growth in percentage, constant prices. 1973-1984 1.2 1984-1994 1.7 1994-2004 2.5 However, high living standards and a booming economy do not come devoid of casting their shadows. Australia economy is facing the challenge a large aging population shrinking the workforce and negatively affecting employment. In 2007 it was revealed that in five Australians aged 16-85 years, one is affected mental disorders. This is approximately 3.2 million of the Australian population. The research findings carried out by Nation Survey of Mental Health and Wellbeing are very perturbing in every sense. This has strained the government as more funds are allocated to health care to help curb the problem. Besides, Australia has been drought-prone a long period. Water management tactics have been brought in the fore to tackle this problem (Meredith & Dyster 75). The peaking of commodity prices in 2008 contributed to the drop in spot prices of iron and coal. The weakening of the Australian dollar may translate to slow investment, growth, and production and employment opportunities in all this areas. The largest importers of Australian goods who include Japan and China have slackened in their importation. Decrease in domestic tourism and a flat inbound has affected tourism and hospitality sectors. Australian labour force is largely supplied by the immigrants. Attracting immigrants to rural areas is the challenge the government has to grapple with since most of them are attracted by the urban centers. The interest rates were slashed by the Reserve Bank of Australia to cope with the concerns brought about by a slowing economy. The first quarter saw the Australia economy expand and the weakest pace as compared to the previous quarter in 2008. It registered a mere 0.3 per cent growth and 2.7 per cent in the Gross Domestic Product. Gordon Valentine (2009), note that the government moved fast to curb the problem that laid precedence for global credit crunch. It expediently assured general guarantee of deposit and also guaranteed the obligations of whole sale debt of Australian foreign bank branches and Australia deposit-takers commercially. Inflation posed another big challenge. In 2008 inflation reached 5 per cent in September. A stimulus package of $10.4billion was announced whose value was around 0.9 per cent of the Gross Domestic Product. Families and pensioners were made using $8.7 billion proportion of the package. In the recent times the percentage of unemployment rose by a margin of 1.3 per cent from 4.2 per cent to 5.5 per cent. The state and federal government realized the importance of investing in transport, water, telecommunication, ports, and education infrastructure to help expand the ability of Australia to supply. The economic stimulus was proposed to go on through 2010. Question 2. Monetary policy is an essential tool used to adjust the economy; its necessity has been strengthened by the successfully floating exchange rate applied in Australia as far back as 1983 in the month of December. Macroeconomic policy is chosen over the fiscal policy since the latter is less effective in Australia. The tool is used to achieve targets in macroeconomics which include alleviation of unemployment, stabilization of economic growth, checking of inflation, and ensuring balance of payment. There are instruments of macroeconomic policy that are applied during extended periods of unemployment, low growth and minimum wages, unstable prices and high rates of inflation (Attard pp. 5). McLean (2008 pp.79) argues that the floating exchange rate is a strong instrument of macroeconomic policy for attaining local macroeconomic goals. Interest rate is used in the short term period to influence the economy. Its main goals is to stabilize inflation and demand within a medium term and expectation of inflationary and to attain the administrative government objectives of underlying inflation rate ranging about two to three per cent that will allow sustainable growth. Sustenance of economic growth within a short period of time is made possible by the macroeconomic policy because interest rates influence the rate at which individuals or corporate organizations invest in the economy. Despite being used as an effective tool in the monetary policy, interest rates floating have their own package of disadvantages that come with them. They result into the exchange rate being unstable and may fall short of establishing the applicable new equilibrium following an external shock. According to Kelly (1992 pp 47) keeping the inflation rate as low as two to three per cent is important in enabling the prevailing government attain its economic goals, the government cannot ensure low levels of employment and achievement of sustainable economic growth devoid of it. The government instigates and stimulates growth in the short run by spending more and more on internal pre-meditated projects. Prolonged period of time or in the long run makes problems of inflationary associated with the policy to surface. This underlines the fact that this instrument should be applied in the short-run. A floating exchange rate strengthens local monetary policy in relation to domestic activities. The policy can also be used as an electioneering instrument as opposed to the provision of the exact guidance of the economy. Within the selected target range the possible desired growth should be attained. The event of regulating the amount of money supplied so as to keep production, employment, and prices stable. If the interest rates are decreased people are motivated to invest and more so low unemployment level is achieved. Consequently borrowing becomes financially viable and discourages saving (McLean 67) According to Jackson (1997), the stronger the Australian dollar is in low inflation the better because it permits interest rates to be slashed without it negatively influencing the exchange rate. The act of raising taxes rates and cutting back on spending make government avoid deficit in the Balance of Payments. At this point the public will be in possession of less money to spend in the economy. Market demand for services and goods will decrease in the short run resulting into a halt in the growth of the general economy. Moderating the economy ensures stability of the economy and lays precedence for expansion of businesses. If government spending was to be reduced this will create unemployment in the short run as jobs which are created by the policy of increased spending are inevitably lost. Question 3 The primary goals of macroeconomic policy is to ensure Balance of Payment, low rates of inflation that can sustain substantial economic growth, attaining low levels of unemloyment in the economy , full employment, stabilty of the economy and prices. The interest rate is an important instrument of macroeconomic policy. The tendency to compare the international interest rate to the local interest rate is envitable. Investors will want to invest their money where the interest rate is low so that the money they borrow for investment does not yield a huge interest that suffocate the investors efforts as they grapple to pay back the borrowed money. The domestic interest rate should always be lower than the international interest rate. If the prevailing interast rate does not sustain the businesses of the investors they will close down and relocate to countries that have conducive macroeconomic policy. The interest rate also regulate the amount of money available for borrowing by the various financial institution. The macroeconomic policy just like production apply the concept of the short run and long run. There are measures that can only be undertaken to stabilize the economy in the short run. All governments have a blueprint of the long term economic goals that are stipulated in various strategic plans. According to Books, LLC (2010), incresing exports and decreasing imports cannot be applied to alleviate the problem of balance of payment in the short run. This goal will come with its own share of sacrifice in the economy. It must be actualised with development in the manufacturing industry to ensure that a country produces its own goods without relying heavily on importing. But a measure such as devaluation of the local currency can be applicable in the short run if at all it can assist in solving the existing problem. When the level of unemployment is high the rate of investment is low. Unemployment will create insecurity as many idle people have the capacity to work but cannot find a job. The idle people can resolve to turn to crime as the only thing to make ends meet (Garnett & Lewis 121). Full emloyment is not possible regardless of it being one goal of macroeconomics, for a the situation to allow economic growth there must be permisable levels of unemployment. If full employment is attained then they will be no economic growth to sustain employment. Macroeconomic policy stem fron the reasoning of the post-classical economist called John Keynes who clearly outlined the need and emportance of government intervention or influence in the economy particularly in the bad times. He asserted that if we allowed self adjustments of the economic aggregates and in the long term this does not occur it may lead to the death of all of us. Consequently he explained that the goverment had the role of coming in if the situation could not be rectified by self adjustment (Otto 98-101). Both fiscal and monetary policies are applied appropriately to ensure the previous stability in the economy is achieved. If inflation rate is allowed to escalate this is not good for the economy the currency must be upgraded to deal with this problem. The government dictates alot to banks and this is the means that it uses if there is a crump in the economy. The whole issue of money supply and money demand can be controlled by the goverment. If the money supply supersedes money demand there will be high rates of inflation that will heart adversely the common man (Dixon & O'Mahony 46-8). The goverment will therefore, with a keen interest, control the amount of money in circulation. It is inevitable to have no inflation but the inflation rate should be resonable. Without good governance the situation can be compared to what Zimbabwe is experiencing in the African continent. Her money value has detoreated immensely since when it was decided the blacks to grab the land of the white settlers creating high levels of insecurity. Price contols are not favourable to investors and the government should look for another means of solving the problem of inflation. Dixon & O'Mahony (2008) argue that balance of payment can be achieved if there is no huge disparity between the exports and imports. Australia is a large economy that employs good macroeconomic instrument to deal with emerging challenges like the recent economic melt down that has left many economies ailing. Sound macroeconomic policies are necessary to ensure stability in the economy. The Australia dollar is strong as compared to other currencies of the world because of increase in export commodities. This makes the Australian dollar gain ground as compared to other currencies. To curb the problem of inadecuate labour force, Australia has allowed immigrants to come in and offer their services. Austrlia has huge natural resources that are exploited and beautiful coastlines that attract tourist who bring in forreign currency thus ensuring Balance of Payment. Works Cited Meredith, David and Dyster Barrie. Australia in the global economy: continuity and change Cambridge: Cambridge University Press, 1999. Garnett, A. and Lewis, P. The Economy’, in Aulich, C. and Wettenhall R. (eds), Howard’s Fourth Term. Sydney: New South Wales University Press, 2008 Otto, G. Central Bank Operating Procedures: How the RBA Achieves Its Target for the Cash Rate. Australian Economic Review. June, Vol. 40 Issue 2, p216-224. Gordon, C. and Valentine, T. Economics in Focus: The Global Financial Crisis Pearson Education, NSW. 2009. Books, LLC. Economy of Australia: Economy of Australia, Australian Dollar, Snowy Mountains Scheme, Lotteries in Australia. New York: General Books, 2010. Dixon Tim and O'Mahony John. Australia in the Global Economy: Year 12 HSC Economics 2009 Mellbourne: Pearson Education Australia, 2008. Kelly, Paul. The End of Certainty: The Story of the 1980s. Sydney: Allen and Unwin, 1992. Attard, Bernard. The Economic History of Australia from 1788: An Introduction October 22, 2010 Jackson, R. V. Australian Economic Development in the Nineteenth Century. Canberra: Australian National University Press, 1997. McLean, I.W. "Australian Economic Growth in Historical Perspective." The Economic Record 80, no. 250 (2004): 330-45. Read More