Macroeconomic Policy Inflation, Unemployment, and Growth - Essay Example

Macroeconomic policy Name Course Tutor Date The economy of Australia has always been regarded as one of the strongest and among the fastest growing around the world. Over the past two decades the Australian economy has had a decline in unemployment and economic growth. With the economy getting involved in thorough policy and structural reforms the economy has become very strong, flexible and very nicely integrated with markets all round the world (Garnett, 2010, p156). Over the recent past, the economy of the Australian globe has been able to conquer the internal as well as external barriers including and not limited to housing boom, major drought and the financial and economic crisis which had not really had a lot of negative impact on the Asian world. The nation is given a lot of resources and a very large primary sector based economy, their major exports are meat, wool, coal, gold, iron ore, alumina, infrastructure and heavy machines not forgetting wheat. These exports continuously increase the growth of the economy from 1788 (Gordon, 2009, p120). The gap has always been seen to continue growing at a rapid rate nearing 1 trillion dollar by the onset of 2007. On the other hand, the rate of unemployment has continued to reduce from 11 percent in 1995 to less than 5 percent as at 2008 (Garnett, 2010, p321). The sector of service is seen to be leading with a rate of employment of 75 percent and followed by the sector of industries which has 25 percent and at the third place is agriculture which has 4 percent. The financial system of Australia has continued to contain an excess which has been used by the government for servicing its debts. In the year 2002 up to 2007, the average surplus budget was averaged at 1 and 6 on gaps respectively. By the year 2006, the government of Australia totally cleared its international debts and is now looked at as the major creditor (Gordon, 2009, p20). Following the 2007 financial study of Australia, the rate of growth of gdp has been seen to hang about at a normal of 3 percent per annum since 2000 and the gross domestic income has been seen to register a 4 percent increase. The fraction of poor people in Australia has been seen to decline so much so that none of the Australian people can be found below the poverty line as it is right now (Gordon, 2009, p54). What was included in the agenda of the Australian economy includes the elimination of trade barriers, creation of a liberal finance sector, introduction of local labor laws as well as the spreading out of labor laws. There being no trade barriers in the transport and trade sectors the economy has been seen to experience high competition in the various sectors (Keynes, 2010). Australia has a pleasing sound built financial system with its growth domestic per capita corresponding to that of 4 most important west European economies. Stressing on strategy and countrywide reforms close to to the floor unrelenting rising price, a housing boom in the market and growing strong relations with china forms the basis of the economic expansion that Australia has recorded more than 15 years ago (Jaffe, 2007, p78). Until the recent 2008 international financial crisis, the above mentioned factors have been greatly causative to the financial growth, consumer and industry self-reliance and elevated export price for chief agricultural harvest and raw materials hastened the financial system to superior growth rate level in the recent years. Deficiency of rain, a strong import demand, and strong currency raised the trade deficit as the road and rail network held up and a rigid labor market slowed down the growth in the number of exports and stirred up inflation up to the year 2008. Throughout the 2008 international economic crisis, the financial system witnessed an extraordinary growth through both physical and monetary incentive, buoyant export demands and investors from china collectively with finely performing financial sector led to the country’s evasion of the depression (Jaffe, 2007, p38). The reserve bank of Australia as one of the g20 was the first state to tighten monetary policy right after the financial disaster though the central bank of Australia which augmented its help rate since October 2009. In the year 2010 the administration plans to maintain symbiotic business relations with china, increase the economic outlay, enact legislations concerning emission trade, and reduce climatic issues such as famine and disturbing bush fires. Policy instruments can generally be regarded as the available options that can be used by the government to moderate economic activities in the country and instruments can be classified to be either monetary policy or fiscal policy. Whereas fiscal policy can be defined to mean all those activities undertaken by the government that relates to its level and composition of expenditure, borrowing and taxation with the major agenda being to raise the economic growth as well as reduce the unemployment rate, manipulate growth and level of how to put and aggregate demand. Monetary policy can on the other hand be defined as the activities that are pursued by the central bank of the nation so as to control the monetary supply in the existing economy (Meredith, 1999, p60). These activities can be on interest rates or exchange rates, and the main aim is to check on the rate and level of expansion of aggregate demand in the nation .in summary; it is used to level the rate of inflation as well as unemployment rate. In order to achieve these set targets, there has to be the use of policing instruments (Jaffe, 2007, p98). Changes in economic policing (which are the instruments) definitely lead to changes on the other variable (which is the target). The major objective of the Australian government is to keep Australian inflation on the very low, thus the country policy makers always have to adopt an inflation targeting monetary policy. Within this definition of financial policy, otherwise called monetary policy, the idea is to sustain inflation at a favorable range; the inflation target can only be reached via the central bank periodical adjustment on the interest rate target. the financial system will take on a constructional monetary policy where the amount of money available in the financial system is lowered thus making the interest rate rise leading to reduced inflation rates. With the introduction of open market operations, the interest rate can be stagnated for a period of time. If there are any changes, such changes made on the interest rate target only happen in response to a number of market indicators in a bid to predict economic patterns. This will make sure that the main agenda of an explicit inflation channel is achieved. When the rate of inflation is higher than the expected the central bank is bound to increase its rate of interests (Meredith, 1999, p167). This is a contractionary policy since it will create room for a just economy and a very low interest rate. However, on the other hand, in the incident of low inflation rate, far below the bank will act very appropriately by reducing the interest. This will in turn increase the quantity of money that is being circulated thus the inflation will be steadily increasing. Monetary policy in a financial system is pegged on the association that exists between the total amount of money in circulation and the rate of interest in the economy since as it is well known, monetary policy takes into account a digit of tools in scheming the total amount of money available and the interest rate to control variables like joblessness, price rises, exchange rates and economic growth. Wherever only the central bank is vested with the only authority of giving out currency, the bank will have the power over the amounts of money that should due in the circulation. Given this ability to change the total amount of money supply it will similarly affect the interest rate to a greater extent (Lipsey, 1995). It is nearly mandatory for policy makers to create realistic announcements, and remonstrations against interest rate targets because they are irrelevant anyway and in addition, they are not essential in relation to monetary policies. When businesses and consumers consider that policy makers are oriented to keeping inflation lower and lower, they will expect prospect prices to be lower. In addition, when an employee has fully suspected that prices are bound to increase in the near future, they will in turn find an employment with huge incomes so as to help curb the rising in price. Thus in addition, the anticipation of poor wages is indicated in wage setting conduct between employers and employees. With low wages there will be no demand pull inflation and cost push inflation since employees earn less and employers pay less respectively (Keynes, 2010). To arrive at the planned low inflation, these low, policy makers ought to have pragmatic declarations. This means that private agents should consider that the announcements will indicate real future policy. in the case that there is an announcement with relates to inflation objectives are designed and they cannot be understood but the firms which work in private or their clients, the setting of wages shall therefore see increased level meaning that allowances will be increased leading to increased inflation.. A lofty wage will augment a consumer's demand pull inflation and a business's cost push inflation. When this happens, if good declarations concerning monetary policy are made by policy makers, the desired policy effects won't be achieved (Lipsey, 1995). However, credible announcements are done in many ways. Firstly it is setting up an autonomous central bank with minimum inflation targets and does not have any output objective. When this happens, private people and companies are confident of inflation being lower because it is leveled by the independent organization. This can be achieved by bonuses like increase salary for the bank governor as a show of the bank’s obligation to its policy targets. This has the meaning that in any policy execution procedure, the reputation of the business must a very significant position but it must not be interplayed with devotion (Otto, 2005, p98). Despite the fact that a central bank may possess a positive reputation based on its perfect performance in carrying out monetary policy, the bank may not have necessarily embraced any particular kind of commitment for instance, aiming at a particular inflation range. Reputation also plays an important part in establishing how well would the target markets agree to the announcement of a certain dedication by the central bank to a policy aim but reputation and dedication should not be incorporated. Moreover, in normal conditions, reputation of the policymaker regarding past policy options never counts, only the known ideologies, the public statements, and professional background of the individuals and organizations among others of the central bank head that matters. In fact many economists have argued that to do away with any pathology in relation with the inconsistence of time during implementation of monetary policy, the chief of the central bank ought to have a bigger aversion for inflation as compared to the rest of the economy (Garnett, 2010, p30). Thus the reputation of the reserve bank of Australia has always been tied to constitutional preparations apart from previous performances when private agents are anticipating on inflation. References Garnett, A. P. 2010. The economy. Sydney: New South Wales University Press. Gordon C, 2009. Economics in focus: the global financial crisis. New York: Pearson Education, NSW. Jaffe, A.B, 2007. Innovation, policy and the economy and citizen since 1960; Cambridge. Cambridge university press. Keynes, J. M. 2010. The General Theory of Employment, Interest, and Money. London: Macmillan. Lipsey, G.R. 1995. An Introduction to Positive Economics. Vancouver. Oxford University Press. Meredith, D.U. 1999. Australian in the global economy: continuity and change. Sydney: Cambridge university press. Otto, G. T. 2007. Central Bank Operating Procedures: How the RBA achieves Its Target for the Cash Rate. Australian Economic Review; June, Vol. 40. Whitehead, G.P. 2010. Economics. New York. The Beaver. Read More