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Report to Currently Macroeconomic Policy in Australia

By shell1203 May 29, 2014 1736 Words
Report to Currently Macroeconomic Policy in Australia
Abstract:
The aim of this report was to analyse the currently macroeconomic policies being applied in Australia, and the impacts on economic growth, unemployment, inflation and trade these four fundamental issues in macroeconomic management. The survey involved researching data on the policy target number of economic growth, unemployment, inflation and trade from the government statistics and Reserve bank of Australia database. And analysing the issues from past, current and future aspects. From the research, the macroeconomic policy is widely used by Australia government to adjust and control the economy. With the analysing of the economic trend and target accomplishment, it is recommended that the Australia government or the central bank should wisely use a various types of macroeconomic policy, such as fiscal policy, monetary policy, foreign exchange rate policy and distributive policy to keep the Australian economy stable.

Table of content:
Abstract 2
Introduction 4
Current policies and target 5
Discussion 6-8
Conclusion 9-10
Reference list 11

Introduction:
There are various policies in Australia conducting the macroeconomics including Fiscal and Monetary policies and so on. This report is going to discuss these macroeconomic policies been used in Australia and the effect of current economy. Both these policies are used by Australia government and central bank to smooth out the business cycle through altering aggregate demand. For the purpose of recovering from the recession, expansionary monetary policies were implemented in Australia in order to the reduction in aggregate demand. Meanwhile Reserve Bank of Australia increased liquidity through multiple purchases of government bonds, which led to a decrease in interest rate. However, whether these policies had effect on reducing the recession in long-term, we need to consider from the perspective of inflation, economic growth, unemployment and trade (Sloman, Norris & Garratt 2010 P.293).

1.1 Current macroeconomic policy
As the influence of global financial crisis, in order to recover from the current financial condition, Australia has conducted a various types of macroeconomic policies to stimulate the economy. Currently, the deficit reflects Australian low national saving and inadequate investment return. Due to reduce the depth of the recession, the Australia government adopted a massive expansionary fiscal policy to enhance domestic savings and to control government public debt, which can remove the inflationary gap and achieve a stable economic growth (Bernanke 2007). Meanwhile, the Reserve Bank of Australia implemented an aggressive monetary policy to purchase multiple of government bonds, which resulting in a decrease in interest rate.

1.2 Current target
GDP: As the Australian economy started to turn its attention away from trade with the Western markets to trade within the Asia Pacific region in these years, Australia has become one of the fastest growing advanced economies in the world at this moment. According to the results of research, the target of GDP is going to increase 2.9% in 2012 (Economy watch 2012). Inflation: And both the Governor and the Treasurer have agreed that the appropriate target for inflation is to achieve the rate of 2–3%, on average, over the cycle, by using the monetary policy. (Reserve Bank of Australia 2012) Unemployment: According to Australian Treasurer and Deputy Prime Minister, Wayne Swan, the budget is expected to create 500,000 jobs in two years and is aimed at bringing unemployment rates down to 4.5 percent, which is 0.47percent less than the world’s average of 4.97 percent (Economy watch: Australia Economic Forecast 2012). Trade: When exporting is more than importing, which is known as a trade surplus, the balance of trade is positive. ((Trading economics 2012)

2.1 GDP

(Trading economics 2012)
As shown on the graph above, Economic conditions in Australia have been stronger than the conditions in the period of recession. In 2009, as a result of global financial crisis, the income of household was decreased. There is not enough money for people to spend or save, the household consumption and the private investment fell. Meanwhile, people pay less tax and buy less import. All of these lead to a multiplied fall in GDP. In order to reduce influence of the recession, the fiscal policy was implemented by the government. At the end of 2008, $10 billion was given in cash to families. Therefore, it dramatically increased the consumer spending and aggregate demand, which contributed to a stable GDP (Sloman, Norris & Garratt 2010 P.301). However, as the influence of the European Sovereign Debt Crisis in 2011, loan became a large part of household income. The Reserve Bank of Australia pursued an aggressive monetary policy. The reductions of interest rate increased the consumer spending as well. As shown on the graph of the final season, GDP increased 0.4% in the December quarter; through the year GDP growth was 2.3% (Trading economics 2012).

2.2 Inflation

(Trading economics 2012)
As presented by the graph above, in September 2008, the inflation was up to 5%, well above the Reserve Bank of Australia's 2–3 % target and at its highest point since 2001. However, only 12 months later in 2009, the inflation rate had fallen to 1.5%, which is the lowest point since 1999. These two Turning points were the result of two related factors. The dramatic fall in oil prices resulted in a decline in the price of automotive fuel for Australian consumers. Second, the credit experienced an uncertainty peak in the end of 2008, meanwhile the government made guarantee on deposits with banks, building societies and credit unions. Therefore, the price of deposit and loan facilities declined in 2009. During the period from latter part of 2008 to 2009, the Reserve Bank of Australia Implemented a steep decline in interest rates by using the monetary policy as the lack of inflationary pressure. The cash rate target had a sharply reduce from 7% to 3% (Claus et al. 2010). According to the statistics above, Australia’s inflation rate was generally stable at the target level in 2010. And as the increasing costs of food and fuel, the inflation rate of the first quarter of 2011 was higher than expected. In the near term, the inflation should continue to moderate. (Economic watch: Australia Economic Forecast 2010)

2.3 Unemployment

(Trading economics 2012)
As shown on the graph above, as the consequences supply-side policies, the unemployment rate did not rise dramatically, instead, it maintained at a rate of around 6% in 2009. During the recession, long term policy was taken to keep the inflation low, as the increased unemployment, the Government's expenditure on unemployment benefits and other benefits are automatically increased to keep the spending of unemployed workers, help to deal with the overproduction, providing a good environment which is attractive for the employment rate. However, although Australia’s economy is recovering, its unemployment rate was 0.22% more than the world’s average rate which has been relatively high in 2010. The unemployment benefits and other subsidies are automatically reduced as well, the tax is increased. The fiscal policy was implemented to support for the economy, under a low-pressure economy, it led to a hysteresis. Owing to the providing Training opportunities of entry-level jobs, the vacancies of average skill of the labour force declined.

2.4 Trade

(Trading economics 2012)
During 2008-09 and 2009-10, the global financial crisis had a sharp short-term impact on Australia’s trade. The major section of exports affected by the global financial crisis was resources. As a result of the strong fall of resources price, the total export values had a strong decline. And in the period from 2010-2012, china became Australia’s biggest two-way trading partner. The trade as a share of GDP had a 32.2% rise, as the result of a period of continued trade reform including domestic liberalisation, liberalisation of trade flows in the WTO’s Uruguay Round and Free Trade Agreements with other countries (Australia Government 2012).

3.1 Conclusion
Due to the demand-side nature of the Australia economy, macroeconomic policies should be used in conjunction with the supply-side influencing microeconomic reforms in order to maintain the policy targets. Fiscal policy influences the economic activities by varying the amount of government balanced budget. In turn, the active of economy can influence the budget outcomes. Therefore, over a short-term period, an expansionary fiscal policy is helpful to stimulate the economic growth, which can increase the government spending and reduce taxation, creating a multiplied increase in consumption. And in the opposite, a contractionary fiscal policy is used to slow the reduction of economy. However, the fiscal policy has time lags when it is undertaken by the government. Especially when an expansionary fiscal policy taken to reduce the recession, and if the time lags are long, it will not take effect until the economy has already recovered. Therefore, the fiscal policy should be used in medium to long run macroeconomic stabilization rather than in the short run. Meanwhile, the monetary policy is taken by the Reserve Bank of Australia to influence the level of interest rates by selling and purchasing the government bonds. When the Reserve Bank of Australia buys bonds, it can create excess liquidity, which will decrease the pressures on interest rates, increase the consumer and investment spending and eventually lead to a fall of unemployment. On the contrary, in order to increase the inflationary pressure, the Reserve Bank of Australia sells bonds, which lead to a rise of interest rates. As the unavoidably time lags and imprecision of the process of this, monetary policy should not be used as a precise means of controlling the interest rates especially when it is going against the expectations of firms and consumers and applying too late. And in long term, if the Reserve Bank of Australia sells bonds, due to reduce income and increase unemployment, household demands decrease. As a result of that, the monetary policy is better to be used in the short-run to counter recession. So it is recommended that all the macroeconomic policies should not be implemented isolated. Due to the time lags, all the policies take a significant amount of time to achieve their goals. From the perspective of short-term and long-term, the government needs to mix the macroeconomic policies to deal with the supply –side constraints of Australian economy.

Reference list

Australia government: Department of Foreign Affairs and Trade 2012, Australia’s trade performance, viewed 13 May 2012, .

Bernanke, B 2007, Principles of macroeconomics, McGraw-Hill, Australia.

Economy Watch 2010, Australia economy, viewed 10 May 2012,
< http://www.economywatch.com/world_economy/australia/ >.

Economy watch 2012, Economic forecast, viewed 13 May 2012,
.

Lim, G. C., Chua, C. L., Claus, E. & Tsiaplias, S. 2010, ‘Review of the Australian Economy 2009–10: On the Road to Recovery’, Australian Economic Review, vol.43, no.1, p. 4.

Trading economics 2012, Australia Inflation Rate, viewed 10 May 2012, < http://www.tradingeconomics.com/australia/inflation-cpi>.

Trade economics 2012, Australia GDP Growth, viewed 10 May 2012, .

Reserve Bank of Australia 2012, Inflation target, viewed 10 May 2012, < http://www.rba.gov.au/monetary-policy/inflation-target.html>.

Viney, C 2009, Mcgrath's financial institutions, instruments and markets, McGraw-Hill, Australia.

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