Current Economic Issues Facing Australia - Assignment Example

Mixed macroeconomics Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 26th September 2012 Part 1 Macroeconomics is a branch in economic studies that deals with how human beings behave while making decisions concerning their households using limited resources. This study involves the supply and demand of goods and services found in an economy (Fenna 2010, pp.362 ).The major determinant of how the supply or demand will be, depends on the prices offered by suppliers in rendering their goods and services which in return makes the consumer decide on which quantity to consume.Macroeconomics involves issues such as growth,unemployment and inflation which affects any policy made by the government. The current state of the Australian economy can be said to have improved slightly and is growing remarkably fast since they started trading with the Asian Pacific regions making its Gross Domestic Product(GDP) increase, inflation rate decrease and more exports and imports in the country. This improvement in the economy has been attributed to China being its greatest exporter of commodities, and in turn it makes Australia be its largest source of imports. In terms of growth rate, Australia in 2007-2008 grew with 3.7 % as its unemployment rate dropped by 4.0%.There was an increased drop in 2009-2010 by 2 % but the economy recovered by 2011-2012 which saw full employment output in the economy (Brittle 2010, pp. 255). The Inflation rate in Australia has experienced a drop in the first quarter in 2012 having the consumer price index (CPI) rise to 0.5% which was attributed to increase in prices of goods and services. Average interest rates in Australia have remained to be 3.5% considering the growth that is in the early months of 2012 (Yoshikawa 2012, pp. 430). This is due to an increase in capital resources that have seen growth in the consumption level. Gross Domestic Product in Australia has reported a gradual improvement over the years which have been possible due to adjusted purchasing power of consumers and an increase in population. Aggregate exports for the year 2012 amounted to 25757 million in July which was attributed to the country having a rich base of natural resources in the agricultural and mining sector. The aggregate imports in Australia were 8586.27 Million which indicates that it has potential in its growth and as a result positive economic impact (Yoshikawa 2012, pp. 430). Some of the current economic issues facing Australia include rising interest rates which are being caused by the high economic growth. The high interest rates are making the consumers in Australia reduce their spending habit. Another factor that is of utmost concern to consumers is the inflation rate, as it is through this that there are inflated prices in housing which makes individuals not have the ability to buy and investors are left with no otherwise but sell at a loss. Another key current economic issue facing the Australian economy is the value in the dollar rate compared to the US dollar which in this case its rise will mean that there will be a decrease in the investment sector and chances to export will be decreased (Makin and Narayan 2011, pp. 380). Part 2 In the economic target, Australia focuses on reducing the inflation rate on the goods and services consumed by individuals. With regard to the Australian Bureau of Statistics, over the past years there has been an increased cost in food and fuel which in return causes inflation to be high. From the statistics that have been given, in 2010 there was an increase in inflation from the financial recession that had been experienced in 2009 from 1.82 to 2.926. In recent statistics, it was observed that inflation will continue to increase from the latest inflation rate of 2011 which was recorded to be 3.038. For many years, the government of Australia has aimed at having a successful economic growth and both external and internal balance and to achieve the following, there has to be a target of increasing the GDP by at least 5% to minimize inflation which largely affects the demand and the supply side of the economy. With the help of the government and other stakeholders in the economy and by adopting both fiscal and monetary measures, it is a sure way that inflation can be avoided. Fiscal policy entails how the government spends its money, and the revenue it gets from the public. This in turn reflects on the economic activity that a country does. In this case there can be a fiscal surplus, deficit or a balanced budget. The budget on the other hand can influence if there is going to be an inflation or not. With the help of the Keynesian theory developed by John Maynards Keynes and adopting the IS-LM model, it will help in explaining the status of the economy which states that governments are the large contributors of productivity in a country in terms of tax and public spending (Yoshikawa 2012, pp. 430). This spending and taxation in turn influences how inflation will affect the aggregate demand and aggregate supply. The Keynesian theory using the IS-LM model dictates several factors such as spending and earning which contributes to the aggregate demand side. The aggregate demand is attributed to the total number of goods and services consumed in an economy known as the Gross Domestic Product. It consists of four components which involve consumption of consumer goods and services, investments done by business people, government spending and net exports. In the four factors, if one component decreases, another one of the components has to increase in order for the aggregate demand to keep the GDP at the same level. For there to be stable economic growth and reduced inflation, the aggregate demand has to equate to the aggregate supply. The supply side has three guiding policies namely tax policy, monetary policy and regulatory policy. In this essay, the report will focus on the monetary policy which is based on the ability of the Federal Reserve to increase or decrease the quantity of dollars in circulation in the economy. The supply side views monetary policy as a tool that can control inflation in a country. The supply side advocates for lower tax rates which will make the investors use their capital productively. The supply side also advocates for the government to lower rates of taxes on revenue as this would be a way to greater productivity. The more spending there is in a country, the more taxation there is. According to the Inside story, an article written by Peter White Ford, he states that, in most rich countries, Australia included, public spending which is the main determinant of how much taxes that will be collected in the country. Half of the Taxes that Australia collects are from social spending. As shown in the above diagram, increase in income leads to an increase in demand of goods and services and in return prices of these goods tend to shoot up. In situations where the disposable income is high then the spending will be more hence in the IS curve, an increase in investment and saving leads to a further shift of the curve to the right. Using the fiscal policy, the government would consider investing more in public by issuing bonds and securities. Changes in the macroeconomic factors may include base lending rates, inflation index, currency revaluation and stimulus packages. The essay will concentrate more on inflation index, currency revaluation and stimulus packages. In inflation index, Australia recorded a 1.20 percent in the first quarter of the year 2012 which was attributed to the consumer price index compared to the purchasing power of individuals and the growth domestic product (Yoshikawa 2012, pp. 430). Initially inflation was regarded as an increase in money supply but of late it has been described as an increase in price which hinders the purchasing power of a consumer thus an increase in the price of any product leads to a decrease in quantity to be purchased. Inflation goes hand in hand with the output in a country, and the interest rates charged on goods. Using the LM Curve to describe this situation, interest rates affects the decisions made by investors and it determines how much output is to be given to the public (Milan 2011,pp.120). A change in income will have no effect on the interest rate but an increase in interest rate on goods will mean a decrease in the output given. Currency revaluation is referred to as a rise in the value of currency as compared to foreign exchange. In other terms, it is called appreciation of the currency. From the year 2012, the Australian dollar was said to be the most trading currency taking the third place from other countries as compared to 2010 where it had ranked fifth behind currencies such as the sterling pound, yen, euro and the US dollar (Milan 2011, pp. 120). This success has been attributed to the high interest rates and the freedom to participate in the foreign exchange as granted by the government. With its exposure to the Asian economies and it having some of the biggest companies in the world, it is a sure way that there is stability in the Australian dollar among other currencies. For the recession not to have a negative impact on the economy, a stimulus plan has to be adopted to ensure that financial crises are less. With this, plan has been adopted to support activities involving housing sector as it is the base of the economy (de Garis 2009, pp.2). Through supporting the housing sector, it will add some percentage in the GDP as more money will come from consumers who are families and pensioners. This surplus package is targeting families as they are the key determinants to how the economy reacts in various situations. In the recent global financial crises, Australia had grown at an average annual rate of 3.6% over the last 15 years and the World Bank expected the growth rate in Australia to be 3.2% in 2011 and an increased growth in 2012 of 3.8%.In the International Monetary Fund prediction in April 2012, It saw Australia being the best performer in the economy for the next two years as the Deutche bank warns of a recession that will be experienced in 2013. Part 3 Growth rate Inflation rate Average interest rate Gross Domestic Product The above four diagrams give a representation of an analysis in terms of growth rate, inflation rate, interest rate and the GDP that has been experienced in Australia over the last years or months. This is however a representation of how each affects the aggregate demand and supply curves using the IS-LM model in the economy. In analyzing the four situations, the growth rate is dependent on the price of goods and services and the consumer’s individual income. In a situation where a consumer has a high income, their ability to access more goods or services will be easier hence making the supplier of the goods and services increase their prices to meet the production costs. In a situation where consumers income is low, their purchasing power is weak hence the supplier does not gain much profit making the graph of aggregate demand shift downwards and aggregate supply remain constant hence, not in the equilibrium state. Increase in the inflation rate leads to increase in prices which become an advantage to the suppliers as they will earn more profit. On the other hand, the consumer is left to suffer as they are buying remarkably little goods with a lot of their income (Buncic and Melecky 2008, pp. 15). Having inflation in an economy leads to less consumption of goods and services, which will deter a country from developing. The LM curve will shift upwards, and the IS curve remains constant. When interest rates are added in banks and other lending institutions by the government, there is a probability that borrowing of loans by the investors will be rather difficult as even the banks will increase the rate in which they are going to lend out their money to investors. This in turn will lead to an increase in the supply side of loans but the demand side will be minimal. As a result of this, there will be no equilibrium in the aggregate demand and supply sides. For equilibrium to be reached, any rise in the IS curve must be followed by a rise in the LM curve. To caution the above effects, there are recommendations on monetary and fiscal policies that have been adopted by the government so as to ensure there is equality in the aggregate demand represented by IS an aggregate supply represented by LM in the economy. Among the fiscal policies adopted include stabilizers that are automatic to offset the periods of low or high economic growth and monetary policies adopted by the Australian government strategies that are effective for changing things in the short term (Leahy 2011, pp. 90). Using the Keynesian theories to explain the monetary and fiscal policies, the government of Australia has the sole responsibility to increase the overall aggregate demand which will be possible if it develops an easy environment where money can be used by consumers thus increase in spending. To ensure that there is aggregate demand, the Australian Government is to increase job opportunities thus increasing the propensity to buy goods and services and also consume them. By adopting the monetary policies only will not resolve the economic crises in Australia but will pose a threat as money will not contribute much towards the economy hence the introduction of fiscal policies. By introducing the fiscal policy in the economy, it will influence the rate of GDP growth in the country and in this case the government comes into action on the powers that it exercises. To stimulate the economy, when the Australian government wants to have an expansionary fiscal policy, it will lower taxes on goods and services and at the same time increase on their spending. This can be a disadvantage as this will increase government debts and taxes which are used to pay the debts may not be adequate to cover for all its expenses. To solve this negative effect, the government of Australia has come up with the sale of its property to the public in terms open market operations where there is an issue of securities and bonds. Another strategy adopted in the fiscal policy is the decreasing or increasing the interest rates of in terms of exports or imports. An increase in the rates of goods or services found in Australia will increase their prices hence foreign investors will find it difficult to invest in the country thus the government is forced to devalue its currency in order to fit in the external market (Tily and Keynes 2010, pp. 24). Monetary policy mainly deals with the money supplied in an economy. The body mandated to issue any money is the central bank of Australia and the Reserve Bank of Australia (RBA).This policy is effective when it comes to inflation where there are fears that the economy may be experiencing financial crises. Financial crises may be due o the uncertainty that is experienced when the markets are not operating in the desired way and there is drastic performance in the global money market (de Brouwer and Gilbert 2005,pp. 130 ). The purchasing power and demand of consumer goods is based on their prices. One strategy that the reserve bank uses to other banks is increasing or decreasing the amount of money in the banks’ reserve. To increase the money supply in public, the reserve requirements are reduced but if they want to reduce the amount of money, they increase the reserve requirement making it impossible for local banks to borrow money from them and in return the banks charge high interest rates to the investors. Though both policies have different ways in which they deal with the economy, both offer solutions that can be effective in solving economic solutions. By the use of central bank and the RBA, hence the decisions affecting the economy in terms of money can easily be solved equilibrium in aggregate demand and aggregate supply attained. References Brittle, S 2010, 'Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia', Australian Economic Review, 43, 3, pp. 254-269. Buncic, D, & Melecky, M 2008, 'An Estimated New Keynesian Policy Model for Australia', Economic Record, 84, 264, pp. 1-16. De Brouwer, G, & Gilbert, J 2005, 'Monetary Policy Reaction Functions in Australia', Economic Record, 81, 253, pp. 124-134. De Garis, D 2009, 'Australian Macroeconomic Policy: Bold Monetary and Fiscal Policy for Risky Times', Ecodate, 23, 3, p. 2. Fenna, A 2010, 'The Return of Keynesianism in Australia: The Rudd Government and the Lessons of Recessions Past', Australian Journal of Political Science, 45, 3, pp. 353-369. LEAHY, J 2011, 'A Survey of New Keynesian Theories of Aggregate Supply and Their Relation to Industrial Organization', Journal of Money, Credit & Banking (Wiley-Blackwell), 43, pp. 87-110. Makin, A, & Narayan, P 2011, 'How Potent is Fiscal Policy in Australia?’ Economic Papers, 30, 3, pp. 377-385. Milani, F 2011, 'The impact of foreign stock markets on macroeconomic dynamics in open economies: A structural estimation, Journal of International Money & Finance, 30, 1, pp. 111-129. Tily, G & Keynes, J 2010, Keynes Betrayed: The General Theory, The Rate Of Interest And 'Keynesian' Economics / Geoff Tily, n.p.: Basingstoke, Hants. : Palgrave Macmillan. Yoshikawa, H 2012, 'A New Micro-Foundation for Keynesian Economics', Journal of Economic Issues (M.E. Sharpe Inc.), 46, 2, pp. 429-438. Read More