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Notes Macro IMPORTANT
Notes Macro IMPORTANT
At the same time, a lower interest rate in AUS tend to result in depreciation of $ since AUS
financial investment are becoming less attractive to overseas financial investments
Export (X) cheaper, Import (M) more expensive. Therefore Increase in Net Export Further
Increase AD and RGDP. As a result, Increase Inflation to RBA’s target 2-3%, Increase in
employment and Decrease in Cyclical unemployment.
2.3 ‘What is the cash rate? What role does it play in monetary policy?
Cash rate is interest rate that banks(RBA and others) charge each other on the overnight
money market.
Therefore if that changes, banks are likely to change interest rate in the same direction for
other bank loans to commercial loans, mortgage rates and short term interest rates. The
cash rate is a benchmark rate that underpins interest rate on deposits and loans.
- The banks also borrow money on international wholesale market, sometime they are
not able to pass on full reduction on interest rate, according to cash rates.
- Cash rate to boost economic activity AD and RGDP and employment or help to
contract a little if the economy is overheating, causing inflationary problems and
causing problems on Net Exports.
3.2 If the RBA believes the economy is about to fall into a recession what actions could it
take?
Conduct expansionary monetary policies, increasing liquidity and deposits, reducing cash
rates, shifting money supply curve to the right and therefore reducing other interest
rates.
3.3 If the RBA believes that the inflation rate is about to increase above its target rate,
what actions could it take?
Conducting contractionary monetary policies, by selling bonds and securities therefore
decrease in deposits and cash reserves in the money market push up cash rates and
interest rate lower Consumption, Investment and Net Export lower AD, AD shift to
the left and Decrease in Price of the product and Inflation to its target rate 2-3%.
4. Disadvantage of Monetary Policy (Is it effective or not right now?)
Not effective in Monetary policy expansionary, when the economy is in a trough or
recession because of low consumer and business confidence the cash rate has never
been this low (0.25%) and analysist are predicting rate cut (decrease until 0.1% even
negative).
If consumer or House hold feel pessimistic about the future income and job security they
will not spend money, instead they will save money. Data for AUS where house hold
saving rate increase from 6% to almost 20%. House Hold tend to save for the worst and
defer their purchases on durable goods than spending. Business confidence
pessimistic about their future sales and future profitability therefore, reluctant to
invest.
- The cash rate is historically at low level and also interest rate but, businesses and
consumer are not spending.
Even though Interest rate is low in AUS, expansionary monetary policy might below
negative impact on dollar (depreciate), but they could be opposing forces, such as th
price of exported resources (AUD and Canadian $ are commodity currencies) If the
commodities we export around the world attract much higher price, the speculator
predict expect higher AUD so they will buy more AUD and push the dollar up
(appreciate)
- AUS is a global company, AUS is impacted by what is happening in the economy of
major trading partners if major trading partner is contracting, There will be a
negative impact on net export of AUS and lower AD.
- An expansionary monetary policy bank, seeks for liquidity/ cash. A bigger
proportion of their deposits than what RBA requires them (e.g 10% deposits in cash,
they might decide to put 30% in cash), because they are expecting a lot of borrowers
not able to put debts and mortgages counteracts the RBA policies on the interest
rates APRA (ensure the banks don’t do wrong things), relax restrictions on lending
practices, because wants to encourage people to borrow more and spend more
money, but consumer and producers as well.
Smooth out sharp decline in economic activity and will reduce the negative impact of higher
unemployment and businesses going bankrupt.
Automatic stabilizer have the affect on lessening the impact of extreme changes in
economic activity.
Discretionary Method
If economy is contracting too sharply; (negative RGDP) govt increase spending (e.g.
Jobskeeper subsidies, increase job allowance, bring forward infrastructure spending) help
economy to recover faster, rather than allowing to the natural course which will hurt
businesses.
3 Fiscal Position
Budget Deficit- Expected Govt Revenue or taxes is less than Expected Government
Spending. (T<G)
To reduce unemployment by more subsidies to firms to hire long term unemployed, more
retraining and re- skilling on long term unemployed .
Government apply when recession
Government applying expansionary fiscal policy by lowering taxes and Increasing spending
- Comparing to previous year budget deficit ( spending > income, deficit add debts) in
previous year is much smaller and this year and next year budget deficit will reach
($216b), compared to previous period we have expansionary fiscal policy
2 ways govt can manage macro economy by taxes and govt spending
Recession -> High cyclical unemployment and deflation(prices going down). Therefore apply
Expansionary Fiscal Policy Increase Govt Spending and Decrease Taxes.
C = 10 + 0.8Y
I = 50
G = 20
NX = 0
Y = C + I + G + NX
Y = 10 + 0.8Y + 50+ 20+0
Y = 80 + 0.8Y
1Y – 0.8Y = 80
0.2Y = 80
Y = 80/0.2
Y= 400 (old GDP)