Accountability of Policies and Targets of Policy Makers as the Backbone of Every Economy - Essay Example

Name of the Student] [Name of the Institution] [Course] [Date] Macroeconomic policies Introduction Every government has varying economic objectives and goals depending on the economic situation of a country at a particular period. These objectives are affected by the fluctuating economic cycles and trends in the business world and also in the world economy at large. However, it does depend on the policies in place which are always effective in shaping the economic direction of every economy. More importantly, economic sustainability is only characterized by proper macroeconomic policies that consider the varying nature of resource demands and prices in the world today. The purpose of this paper is therefore to analyze the experience of the Australian economy over the last decade in relations to the above concepts. In this case, it will address the challenges that have faced the policy makers. With its sole objective which has been of controlling inflation to achieve some economic stability and growth, this paper will go further to explore various experiences that the Australian economy has undergone. In coming up with reliable analysis, the paper will also discuss some of the macroeconomic policy frameworks that have shaped the Australian economy. Eventually, it will come up with reliable conclusion that can form the basis of future information as far as Australian economy is concerned. Discussion Macroeconomic policy is a policy that affects the whole economy in various ways but generally aims at controlling economic variations in the business cycle. In Australia, the macroeconomic policies in this case are categorized into two policies; the monetary policies and the fiscal policies which are administered by the Reserve bank of Australia and the government respectively. For proper achievements of the set objectives, implementation of these policies is very significant. They determine the movements of Australian economy, a role which has been vital in the last decade. Moreover, full employment of labor resources, equal distribution of income and wealth, external stability, sustainable economic growth, unemployment, and inflation are just but some of the significant roles which these polices facilitate in achieving economic goals and objectives (Copland 1997). These policies have had real and observable impacts in helping the country achieve its economic objectives. The country which has been characterized by vibrant labor market in the last decade has therefore made specific economic targets based on certain factors. One of these factors is the full employment of factor market generally at the natural rate of employment. This has seen a decreasing level of unemployment in the Australian economy. One of the objectives of the Australian government in the last decade has been to control inflation so as to enable some macroeconomic stability and growth to be realized. However, according to economic world reports, the Australia’s unemployment rate has been high relatively in the recent years. In fact, by 2010, the Australia’s unemployment rate had reached 5.192 percent. This figure is considered 0.22 percent more than the average of the world’s 4.97 percent overall rate of unemployment. The government’s response to this is to create more jobs in two years so as to bring this rate to 4.5 percent. However, no matter the action taken by the government, unemployment will be seen because of he Phillip’s curve relation (Fuhrer, 2009). Bringing down unemployment rate can be easy through increase in government’s expenditures in creating jobs, but the future inflationary pressures can be off target. In this context, the monetary policies which have been used for contractionary measures in the Australian economy have discarded the control of rising unemployment rate, but have controlled inflation. Inflation, which is characterized by a constant increase in the prices of goods and services, is also an important factor as far as Phillip’s curve is concerned. According to the Australian bureau of statistics, the increasing cost of food and fuel in the first stages of 2011 saw the Australian inflation rate to unexpectedly increase. Due to macroeconomic policy adjustments, the inflation rate was recovered by the economy from the financial crisis, a situation which was better than many other big economies in the world. Going backwards, the Australian economy has indicated controlled inflation rates of less that 2.9 percent rate, until recently, when it unexpectedly rose to 3.038 in 2011 (Kennedy, 2000) . In aiming to achieve full employment resources, especially for factor market, the level of inflation is always a force to consider in the economy. Phillip’s curve meanwhile qualifies this objective since in trying to achieve full employment of factor market, the inflationary repercussions should be considered. Phillip’s curve therefore provides fundamental relationship between inflation and unemployment rates, which have effects on aggregate demand and general economy. Consider the graph below (graph1) which represent Phillip’s curve of inflation and unemployment. The stability of employment of macroeconomic polices and monetary policies administered by the Australian government and the Reserve bank of Australia have helped in controlling the fluctuations in the economy. Phillip’s curve demonstrate an economic reality in the sense that full employment resources can only realized at some level of inflation and unemployment in the economy. In this case, unemployment, which is a situation where labor resources are not fully utilized, cannot reduce beyond the natural rate of unemployment. At the same time, inflation rate in the economy cannot be reduced to Zero given the natural rate of unemployment. Therefore, Phillip’s generally summarizes the fact that appropriate level of unemployment and inflation is very considerate and healthy for the economy. Inflation rate High inflation, but low unemployment k High unemployment but, very low inflation Unemployment rate At some point k, the rate of inflation equals the rate of unemployment in the economy. This is the point of natural rate of unemployment. Beyond this point, unemployment becomes a crisis in the system and the economy does not meet the full employment of factor market target. In this case, the unemployment rate should decline by the growth rate so as to counter the corresponding onset of inflation. It is true to this point that Australian labor market has been very dynamic, owing to changing technological advancements, demographic variations and the general economy over the decade. This has created a number of challenges to the policy makers in Australia despite the steady growth of the economy (Kennedy, 2000). Macroeconomic policy instruments are those quantities, macroeconomic in nature, which can be directly be controlled by the policy maker, like the government. These instruments are used to shape the direction of the economy, depending on the policy adopted by either the government or monetary authority in a country. The government always control instruments related to fiscal policies, while the monetary authority like the central or reserve banks control monetary policy instruments such as bank rates, variations in reserve ratios, open market operations, among others. Economic target are the goals of an economic policy that the policy maker aims to achieve. Every macroeconomic instrument has its role to play and the policy makers use a specific instrument so as to achieve a specific economic target. Some of these monetary and fiscal targets may include attainment of a specific range of inflation rate, bank rate or growth rate (Lindauer, 1968). It is important to note that economic instruments and targets always operates in pair, since adoption of any policy using some specific instrument is aimed at achieving some target as indicated above. The performance of any economy depends on the effectiveness of the macroeconomic instruments put in place. In addition, it also depends on the timely use of the said instrument because fluctuations in the economic or business cycle calls for different macroeconomic instruments in place. Foe example, during situations of high inflation, expansionary macroeconomic instruments are not recommended since they will fuel further inflation. According to Keynesian theory however, during conditions of stagnating growth, expansionary instruments could be used to stimulate growth. The Australian economy has been supported by use of various instruments, which have been used over the decades to achieve various economic targets and to manage some economic activities. With the past decade giving Australia periods of uninterrupted economic growth, policies targeted at strengthening the service and resources industries have been used so as to boost the economy. The monetary structure has been stable and modernized to effectively control the monetary instruments. Investment is a very important economic growth mechanism and the classical economist had their view wit the graph above. Equilibrium investment occurs when expected rate of return on investment equals the interest rate. Therefore the interest rate (macroeconomic instrument) controls investment overally in the economy and causes swings in investments. The following graph illustrates the trade-off between interest rate and investment. Expected Rate of Return 5 3 20 50 Investment Economic theories are the salt to understanding macroeconomic policies and their applications. These theories are the principles based on various assumptions bout the economic reactions after some agents have acted. They form he basis of economic arguments and orientations. More importantly, they have enabled the functionality, development and growth of economies in the world. Some of the macroeconomic theories are discussed below During the times of economic crisis, like the previous global economic crisis, various theories have various recommendations. Keynesian theory claims that economic crisis is characterized by stagnated growth in the economy. This means that the aggregate output is not in equilibrium with the aggregate demand in the economy. This theory support fiscal policy to be used, whereby the government increases its expenditure to stimulate e growth. In this case, it will be arresting the short run effects to the economy during such financial Crisis. Therefore, according to Keynesian theory, expansionary policies are most recommended in the short run equilibrium, because in the long run, there is death ( Olsson, 2012). This theory is in opposition of the classical theory as far as management of the financial crisis is concerned to the economy. This theory calls for the free intervention of the forces of demand and supply to bring back the economy to stability. It clams that expansionary policies during this time could further increase aggregate demand through increased liquidity in the system. This would make the general prices in the economy to increase, which fuels inflation. However, they claimed that liquidity should induce in the system just enough to maintain expenditure in the short run. Eventually, in the long run, the economy will be stable through the forces of demand and supply. Classical Read More