Economics management assignment essay on: “MACROECONOMIC POLICIES AND THEIR IMPACTS”

(The expansionary monetary policy decisions of the Reserve Bank of Australia (RBA) during the six months after the global financial crisis (GFC) escalated in September 2008)1. Executive Summary:

This report aims at describing the Australia’s present economic landscape & summarizes the Macroeconomic policies its regulatory bodies have incorporated in order to maintain a level of sustainable growth (Murray, 2009).

Macroeconomic policy operates within the framework of goals and constraints. This report highlights the expansionary monetary policy decisions of the Reserve Bank of Australia (RBA) during the six months after the global financial crisis (GFC) escalated in September 2008.

This report further takes into consideration the implications of the expansionary monetary policies undertaken by the Reserve Bank of Australia on the big business houses, consumers as well as the national economy in general.2. Introduction

A country’s economic state of affairs can be evaluated by the factors out of the jurisdiction of its governing body & the factors implemented directly through macroeconomic policy.

This report stresses upon the fact & then analyzes the decision of Reserve Bank of Australia to undertake various cautious monetary policies which would benefit the Australian economy during its slow recovery post of the global financial crisis (Murray, 2009).

The macroeconomics policy can be widely categorized into two heads i.e. Monetary Policies and Fiscal Policies.

The Monetary policy is pursued by the Reserve bank of a country i.e. Reserve Bank of Australia.

Fiscal policy is also another most important tool in the hands of the governing body to cope up with its financial requirements.

2.1 Monetary Policy:

2.1.1 Current Monetary Policy StanceMonetary Policy is a tool which is used by the Reserve Bank (of Australia) to persuade the inflation as well as the output. Former to the Global Financial Crisis, the main aim of this monetary policy was to take care of the economic growth & keep its target inflation up to 2-3% by deviously raising the interest rates in the economy or decrease its interest rates (Murray, 2009).

Since 2007, “monetary policy has been somewhat contractionary, but has now plateaued at 4.25%” (ABC News, 2010).

2.1.2 Monetary Policy in Relation to the GFC

The Reserve Bank of Australia (RBA) loosened its monetary policy for the past one year or so in order to challenge the rectification of the loss of consumers as well as the big business houses caused due to the Global Financial Crisis.

The governing body i.e. RBA reduced the interest rates & increased the supply of money in the market thereby leading to an increase in the consumption by the following i.e. business houses, individuals and etc.

There was a cut in the cash rate by the Reserve Bank of Australia. An overall drop of 4% was significantly made within the 6 months (See fig. 1).

“The cash rate of approximately 7.25% was held down from Mar-Aug 08 to a 49-year low (AAP News, 2009) of 3% by April 2009. This interest rate was then duly held for a period of 5 months, showing a slight rise to 3.25% in the month Oct 09” (ABC News, 2010)

2.1.3 Effects of Macroeconomic Policy

The strategies and policies forced by the Australian regulatory body i.e. Reserve Bank of Australia & the Australian Government have shown a positive result in fighting with the Global Financial Crisis, preventing from recession & leading to an evident recovery (Gruen, 2010).

This can be illustrated with the help of the Australia’s present market condition environment, which is featured by an increase in the investments, consumption levels & deductions in unemployment rate which would reflect a favorable Aggregate Demand & the national output (Gruen, 2010).

The overall impact of the expansionary monetary as well as the fiscal policy has resulted a positive impact with regards to the level of Gross Domestic Product (GDP) growth rate of 0.9% in Dec’09 quarter from -0.8% in Dec’08 (ABC News, 2010).

According to the sources of the Treasury Reports, without the implications of the expansionary monetary policies the GDP for the Australian economy would have been accounted to 0.7% (Gittins, 2010).

3. Arguments in support of the policy decision

The monetary policy formulated & undertaken by the Reserve Bank of Australia was one of the key tools used by the regulating authorities.

In general, when the fiscal markets are fully equipped, the monetary policy decisions all over the globe are predominately guided by achieving the inflation targets & concerned by the short run aggregate demand (AD). With the beginning of the global financial crisis (GFS), conservative monetary policy has been formulated as well as implemented in response to the considerable reduction in the aggregate demand & the weakening of the global financial market conditions (Gittins, 2010).

According to the Australian Government 2008, Central banks worldwide undertook conventional monetary action with speed and determination. In the United States, the target federal funds rate was cut rapidly from 525 basis points in September 2007 to 0 – 25 basis points by December 2008. Almost every other country followed the same path, reducing interest rates on average by 330 basis points in developed countries and 300 basis points in emerging economies (Battellino, 2009). Currently Australia is one of only four developed economies with official interest rates above 1 percent.4. Arguments against the policy decision

For the past many years, various weaknesses as well as discrepancies in the whole financial system as well as in the authoritarian framework have been exposed.

In formulating & implementing the various policies mentioned above, it is essential to adopt an apt exit strategy in the long term.

There are various arguments in regards to the monetary policy, the first argument is to have a stable price which would help to have a uniform price all over thereby not leading to any kind of fluctuations in the Australian stock market  & firmly anchored inflation expectations (Gittins, 2010).

The second argument is to decline the dependence on provisional support mechanisms in the fiscal sector & allows normal functioning of markets (Papademos, 2009).

The timing of implementation of these strategies will depend on the pace of recovery and the return to normality in financial markets (Papademos, 2009).

Around the world, there are rising concerns about fiscal sustainability. In the

United Kingdom, according to OECD projections, the gross government debt-to-

GDP ratio could reach 90% in 2010. The government deficit is expected to be

14% of GDP next year and in the OECD as a whole, 9% of GDP (). In Australia, the government deficit is one of the lowest, at 4.9

 5. Conclusion

Though, there are a various factors which would determine Australia’s current economic market stability. This report majorly identified & focused on the fact that how Australia was able to avoid itself from being affected by the global financial crisis. This was made possible due to Australia’s government expenditure assisted by consumption, and a strong export sector supported by rising prices of the commodities (Papademos, 2009).All the factors listed above along with the rigorous expansionary monetary policy have led Australia’s economic as well as the market condition in a healthy position which leads to the economic recovery from the global financial crisis.

This report also stresses regarding the neutral monetary policies laid down by the Reserve Bank of Australia which benefited the Australian market.

Maintaining the appropriate cash rate fulfilled the Reserve Bank of Australia’s goals, thereby leading to a rational response to the economic environment (Murray, 2009).

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