GROUP REPORT ASSIGNMENT

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GROUP REPORT ASSIGNM
ENT

25555


MACROECONOMIC THEORY

AND APPLICATIONS

1

CONTENTS

1

Executi ve Summary

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2

2

Introducti on

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3

3

Australia’s
current economi c si tuati on

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4

4

Fiscal Policy

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8

5

Monetary Policy

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10

6

The RBA’
s August deci si on

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12

7

Concl usi on

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14

8

Bi bli ography

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15

9

Turni ti n Report

10

Marki ng Rubri c



MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



2

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559

2

EXECUTIVE SUMMARY

Thi s essay will eval uate the RBA’s deci si on not to change i nterest rates at the August ’10 monetary poli cy
meeti ng.

Thi s anal ysis was made by expl ori ng the Australi an economi c cli mate, anal ysi ng the current
macroeconomi c mi x and
by
appl yi ng these to the RBA’
s monetary poli cy goals.

In li ght of the Gl obal F
i nancial
Crisis (GFC),
Australi a has performed comparabl y wel l
.


Current GDP growth rate to thi s quarter is 3.2%, whereas
as most other
OECD
economi es
have recorded negati ve growth
, the US recordi ng negati ve growth

of
-
2.4%.

Fiscal and Monetary policy

have created and devel oped

a

posi ti ve economi c cli mate by targeti ng any symptoms
of a pervadi ng recessi on through copi ous government spendi ng and l ooseni ng monetary pol icy.


In spi te of
i ts
apparent stabili
ty, Australia’s economy

is sti ll

fragil e
.


Interest rates have been hel d at 4.5% for the past three
months to mai ntai n this deli cate bal ance.



A further reduct
i on i n i nterest rates may have i ncreased growth
at
the cost of
i ncreasi ng i nflati onary pressures. An i ncrease i n i nter
est rates

may have dampened consumer
confi dence too soon.


Thus, the RBA’s deci si on to mai ntai n i nterest rates is i n li ne wi th i ts goal of maxi mi zi ng
non
-
i nfl ati onary growth.


MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



3

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559

3

INTRODUCTION

A country’s

economi c si tuati on is determi ned by both factors out
of the control of i ts governi ng body and factors
i mpl emented di rectl y through macroeconomi c poli cy. This report ai ms to descri be Australi a’s current economi c
landscape and outli ne the Macroeconomi c polici es
i ts governi ng bodi es have i mpl emented to try and
mai ntai n a
l evel of sustai nabl e growth
. It then stri ves to anal yse the reasoni ng behi nd the R
eserve
B
ank
A
ustralia
’s

(RBA)

choice to mai ntai n the current cash rate at 4.5% thi s month. Thi s
report

seeks to

i ll ustrate

the current rel ati ve
stabili ty of the Au
strali an economy
as dri vi ng the current

macroeconomi c stance
, a combi nati on of a mil dly
contracti onary
fi scal and

neutral

monetary

stance
.

The paper proposes to anal yse the

RBA
’s

decisi on to take a
cauti ous monetary stance
benefi t

to the Australian

economy
i n li ght of

i ts

sl ow recovery post the economi c crisis
and

the

potenti al i nfl ati onary pressures a fal l i n i nterest rates coul d cause.



MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



4

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559

4

AUSTRALIA’
S

CURRENT ECONOMIC SIT
UATION


Australia’s economic condi ti on is arguabl y one of stabi li ty and econom
ic recovery.

Despi te gl obal economic
uncertai nty, Wayne Swan
state
s

that the Australi an economy remai ns i n a strong posi ti on wi th a posi ti ve
economi c future
(Austral i an Government, 2010)
.

Australia
is recordi ng a 3.
2
%
annual
growth rate

i n GDP
to thi s

quarter
1

(The Australi an Bureau of Statisti cs,
2010)
.


This is
equal to

the 30 year average growth rate
and above the 2009 f
orward esti mate to for
thi s

year
(see
Fi gure
1
:

Real GDP Growth
)

(Austral i an Government, 2010)
.


Figure
1
:

Real GDP Growth

Australia’s GDP is predi cted to i ncrease
to 3.75% to 4% dur
i ng the 2011
-
2012 fi nancial
year
, though
may be an

unreasonabl y hi gh GDP predi cti on
, gi ven the fragili ty of the recovery

(Reserve Bank of Australi a, 2010; Bri nsden,
2010)
.

4.1

EXTERNAL COMPARISON

Austral
ia has mai ntai ned conti nuousl y i mpressi ve GDP growth rel ati ve
to

other comparabl e countri es si nce the
Gl obal Fi nanci al Cri sis (
GFC
)

began i n 2007. Australi a managed not to fall i nto a technical recessi on
2
, achi evi ng
1% posi ti ve growth i n the 2008
-
2009
fi n
ancial year

where
much

of the OECD
was

i n recessi on.

Fi g
ure 2
(Australian Government, 2010; Reserve Bank of Australia, 2010; Bureau of Economi c Anal ysis, 2010)


hi ghl i ghts Austral ia’s

rel ative economi c success.




1

To
second

quarter 2010.

2

Two quarters of si mul taneous negati ve GDP growth.

MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



5

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559


Figure
2
: International GDP Growth

4.2

AUSTRALIA’S ECONOMY
B
Y COMPONENTS

OF GDP

GDP i s the
aggregate
fi nal
domesti c producti on of goods
and services. It consi sts of
consumpti on

(C)
,
i nvestment

(I)
, net g
overnment
fi scal activity

(G)

and net exports

(X
-
Q)
, as del i neated by the
fol l owi ng equati on:

Equation 1: GDP


















Any accurate
descri pti on o
f Australia’s current economi c si tuati on must factor i n changes i n the components of
GDP.

4.2.1

CONSUMPTION

Consumpti on is a major i ndi cator of a country’s economi c si tuati on.


Australia’s retail spendi ng i ncreased i n June
to reach an overall 0.8% i ncrease i n vol ume over the June quarter

(The Austral ian Bureau of Stati stics,
2010)
.

Thi s marks a trend of modestl y i ncreasi ng confi dence i n Australi a,
wi th both busi ness and consumer confi dence
greater than the l ong
-
run average
.



However, as a resul t of the recent economi c crisis, Australian consumers are now general l y more
conservati ve

(Gruen, 2010)
. Thi s is marked through an i ncreased househol d savi ngs rate, up 1.3% i n May 2010

(Reserve Bank
of Austral i a, 2010)
.

Thi s consumpti on

growth contri butes more than 1.5% of Australi a’s G
DP

growth

(Reserve Bank of Australia,
2010)
.

MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



6

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559

4.2.2

INVESTMENT

There has been growth i n net i nvestment, dri ven by mi ni ng. There was an expectati on that the mi ni ng tax would
reduce
i nvestment from overseas, but i nvestment i n the mi ni ng i ndustry rose by 29% i n the June quarter, as
compared to the same quarter l ast year, and al most 50% above expectati ons

(Pascoe, 2010)
.

Furthermore,
there has been recorded
a mi l dl y opti mi sti c i nvestment
outl ook

(Pascoe, 2010)
.

4.2.3

NET GOVERNMENT EXPEN
DITURE

Government expendi ture rose
dramati call y i n response to the GFC, but i s sl owi ng

due to fears of oversti mul ati ng
the economy,
crowdi ng out pri vate

i nvestment and pl aci ng too great a debt burden on Australi a
. For more, see
secti on
4
, bel ow.

4.2.4

NET EXPORTS

N
et exports have posi ti vel y affected the GDP, wi th the current account defi ci t falli ng from 16 billi on i n the fi rst
quarter of the year to l ess than
6 bil li on currentl y

(Hel yar, 2010)
. Australi a is now runni ng a trade surpl us (whi ch
is not common for Australia) that has added .4% to the June quarter’s GDP growth

(Stutchbury, 2010)
. This has
la
rgel y been caused by i ncreased
Southeast Asi an demand

for Australian
mi neral
exports. Export

quanti ti es are
set to
dramati call y i ncrease next year due to capi tal i nvestment easi ng capaci ty constrai nts on Australi a’
s mi ni ng
i ndustry
.

4.3

UNEMPLOYMENT

RATE

Aust
ralia’s unempl oyment rate
i ncreased

i n response to the GFC i n 2009, peaki ng above 6%. Si nce then, i t has
begun to fal l

and was at

5.1%

i n June (Mi nutes of Monetary Poli cy, August 2010).
There i s some evi dence that
shows that some of thi s decrease i n unemp
l oyment rate i s due to a decreasi ng parti ci pati on rate
, whi ch
fell to
approxi matel y 65%, due to hysteresi s and
di scouragement of the l ong term unempl oyed i n the l abour force

(Reserve Bank of Australia, 2010)
.

Overall, Australi a’s unempl oyment rate

i s much l ower than most OECD
countri es, wi th the US
at

9.5%

(Uni ted States Bureau of Labor Bureau of Labor Statisti cs, 2010)
.
This bodes well
for the Austral i an economy.


4.4

INFLATION

Austr
alia’ underl yi ng i nfl ati on rate is currentl y at 2.75% (Mi nutes of Monetary Pol icy, August 2010), whi ch is the
fi rst ti me i n nearl y three years i t has been under 3%.

Australia’s headli ne Consumer Pri ce Index was at 3.1%.


The upwards pressure on i nfl ati on
can be expl ai ned by the GDI outpaci ng the GDP

due to i ncreased Asi an
demand (pri maril y from Indi
a

and Chi na) for Australi an mi nerals.

Thi s has been offset by

passi ve consumer
demand i n recent ti mes, l ower wage growth i n 2009, the appreciati on of the Austr
al ian dollar, retail pri ce
discounti ng as well as a decli ne i n domesti c holi day accommodati on prici ng and li ttl e i ncrease i n utili ty pri ces in
the l ast quarter.

MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



7

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559

4.5

EXTERNAL STABILITY

Whilst Australia’
s net exports
are growi ng fast, Austral ia still has a pr
ob
l em wi th external stabili ty: a risi ng
Australian dol lar is decreasi ng the i nternati onal competi ti veness of Australian exports and
forei gn
debt servi ci ng
counterbalances
Australia’s

posi ti ve net exports to bri ng Australi a i nto a g
rowi ng current account defi
ci t.


Whi lst
the Australian dollar has not yet dampened demand for Australian pri mary exports,
there has been i ncreased
outsourci ng of secondary and tertiary producti on
due to thei r rel ati ve cheapness.

Whilst Austral ia’s current
account
defi ci ts, and the
l evel of pri vate forei gn debt, are

hi gh, i nvestors remai n
cal m, si nce the CAD i s
decreasi ng at record rates

(Marti n, 2010)
.

T
he R
BA

conti nues to stress that external gl obal uncertai nty, especi all y from Europe, remai ns an issue.

Further,
Australia’s reliance on
Asian

growth
and demand
(see
Fi gure
2
: Internati onal GDP Growth
, above) for mi ni ng
exports are maki ng Austral i a’s e
conomi c future fragi l e
(Reserve Bank of Austral i a, 2010)
.




MACROECONOMICS: THEORY AND

APPLICATIONS (25555)



8

Ottensooser

10873305
, Si vasubramanian

10856817
, Bergamin

10682336
, Lambides

19779559

5

FISCAL POLICY

Si nce the late 2008, the approaches taken by our central macroeconomi c bodi es have been di rected by
i ncreased volatili ty of worl d markets due to the
GF
C
, a worl d recessi on due to
the shortfall of li qui di ty of
i nvestment banks i n the Uni ted States
. As a resul t,
macroeconomi c
polici es

have been

i mpl emented
wi th a vi ew
to negati ve the GFC’s effect on the Australi an economy whi lst still provi di ng for
adequate exi t strategi es can be
executed once stabi l ity returns.

Fiscal Poli cy is the mechani sm by which government al ters their spendi ng, ei ther i n the form of government
i nvestment (G) and/or transfer payments (TR), or thei r coll ecti ons through the taxat
i on rate (t) to reduce
fl uctuati on i n the busi ness cycl e and l essen the output gap.

5.1

DISCRETIONARY FISCAL

POLICY

Australia’s current fiscal stance is mil dl y contracti onary wi th a Budget Defi ci t of 40.8bil (2.9% of GDP) for 2010
-
11 compared to 2008
-
09 defi ci t of 57.1bil (4.4% of GDP)
(James & Sebastian, 2010)
.

F
or the past two years,
how
ever, the

Australian Government has been
appl yi ng
expansi onary

fiscal poli cy through a $42bil Sti mul us
Package to ward off recessi on
symptoms
due to the GFC

(Parliament of Australi a, 2010)
. This
sti mul us

comprised

of Gov
ernmen
t Investment expendi ture

and Transfer Paym
ents

to i nfl uence
the l evel of aggregate
-
demand and output
,

thereby i ncreasi ng equi l ibrium

i nco
me and GDP.

The equi l i bri um posi tion of the economy l i es where AD=Y;
as

i l l ustrated by Eq1.

Eq
1
















̅



̅
̅
̅
̅


̅


̅


̅
̅
̅
̅
]

Discreti onary strategi es outli ned by the
Sti mul us Package i ncl ude gov
ernment i nvestment expendi ture
on
large
-
scal e i nfrastructure projects and mi croeconomi c reform i ni tiati ves. $14.7billi on was spent on school
hal ls extensi ons, $10.5billi on for resi dential buil di ng projects and ceili ng i nsulati o
n for homes, and $890milli on
for road constructi ons
(Gi tti ns, 2009)
.

Thi s has resul ted i n job
-
creati on,
i ncreased acti vi ty i n the

constructi on
sector and will conti nue to i mprove AD i n the medi um
term
. $2.7bi lli on has been spent on busi ness tax
-
breaks
encouraged risk
-
averse
busi ness
es to conti nue thei r acti vi ti es

(Gi tti ns, 2009)
. Thi s is i n accordance to the
si mpl e Keynesi an model; output (Y) ri ses proporti onatel y to

the change i n G

as a product of the government
expendi ture mul ti pl i er
3
.

T
he government pl ans to return the budget to surpl us by 2012
-
13 a few strategi es are bei ng put i n place to
sl owl y wi thdraw the expendi ture. Thi s i ncl udes confi ni ng annual real grow
th to 2% unti l the budget surpl us
reaches 1% of GDP
(Parl iament of Australia, 2010)

by li mi ti ng expendi ture, and i ncreasi ng revenues through



3

i.e. the change i n government expendi ture effects a change i n equi l i bri um i ncome
on a
greater than 1:1 basi s because of

i ts further effect on
reduci ng taxes and i ncreasi ng consumpti on.

MACROECONOMICS: THEORY AND APPLICATIONS (25555)



9

Ottensooser

10873305, Si vasubramanian

10856817, Bergamin

10682336, Lambides

19779559

Super Profi ts Tax (12bil
li on

i n
tax revenue i n four

years) and hi gher excise on al coh
ol and ci garettes

(Swan &
Rudd, 2010)
.

The Sti mul us Package also i ncl udes $12.7billi on i n TR,
a
one off tax free cash
-
handouts of up $950 to i ncome
earners, si ngl e i ncome two
-
parent fami li es earni ng up to $150,000, famili es wi t
h school chil dren, students and
apprenti ces, and drought affected famers

(Gi tti ns, 2009)
. The i ni ti ati ve encouraged i ndi vi duals to spe
nd
money (i ncrease consumpti on
) thereby provi di ng an i mmedi ate sti mul us to the economy.

These resul ts
correspond to the theoreti cal noti on (
Eq1)
, that an i ncrease i n TR wi l l di rectl y affect the consumpti on functi on
(Eq2) hence resu
l ti ng i n an i ncrease i n AD
.

Eq2




̅






̅
̅
̅
̅





5.2

NON
-
DISCRETIONARY FISCAL

POLICY

Other
,

non
-
di screti onary fiscal
outcomes
i ncl ude the effect of automati c stabi lisers. As l ess tax recei pts are
recei ved by the Government duri ng peri ods of l ower output,

l eakage caused by i ncome ci rcul ati on reduces i.e.
when Y decreases, tY fal ls. Hence consum
pti on i n
evi tabl y rises (Eq2) and so do

output
s

(Eq1
). Duri ng peri ods
of economi c recessi on, uncertai n empl oyment prospects and i nconsistent i ncome
-
fl ow resul t i n rises i n
wel fare benefi t payments.



MACROECONOMICS: THEORY AND APPLICATIONS (25555)



10

Ottensooser

10873305, Si vasubramanian

10856817, Bergamin

10682336, Lambides

19779559

6

MONETARY POLICY


6.1

CURRENT MONETARY POL
ICY STANCE

Monetary

Poli cy is the i nstrument used by the Reserve Bank (of Australia) to i nfl uence i nflati on and output.
Pri or to the GFC, the mai n functi on of the monetary poli cy was to manage economi c growth and mai ntai ni ng
target i nfl ati on of 2
-
3% by subtl y raisi ng i nte
re
st rates to sl ow the economy

or l ower rates as a
sti mul us
.

Si nce
2007, monetary pol i cy has been

somewhat contracti onary
, but has now
pl ateau
ed
at 4.25%
(ABC News, 2010)
.

6.2

MONETARY POLICY IN R
ELATION T
O

T
HE
GFC

The Reserve Bank

of Australi a l oosened monetary policy over the last year or so i n attempt to recti fy the l oss
of consumer and busi ness confi dence caused by the GFC. Thi s was achi ev
ed by reduci ng i nterest rates

and
i ncreasi ng the money suppl y i n the economy thereby i ncre
as
i ng consumpti on by i ndi vi duals
, busi ness
i nves
tments and hence output
.

The RBA’s cutti ng of the cash rate was gradual; an over 4% drop was made wi thi n 6 months (Fi g
3
). The cash
rate of 7.25% hel d from Mar
-
Aug 08 down to a 49
-
year l ow
(AAP News, 2009)

of 3% by Apri l 2009. This
i nterest rate was hel d for a 5 month peri od, onl y ri si ng sl ightl y to 3.25% i n Oct 09
(ABC News, 2010)

6.3

EFFECT OF MACROECONO
MIC POLICY

The pol i ci es and strategi es i mposed
by the RBA and Australi an Government have been successful i n combati ng
the GFC preventi ng recessi on and l eadi ng to our apparent recovery. Thi s i s ill ustrated through Australia’s
current economi c envi ronment (see secti on 3), whi ch is characterised by i ncre
ases i n l evel s of consumpti on,
i nvestment, and reducti ons i n unempl oyment whi ch have refl ected favourabl e on AD and the nati onal output.

MACROECONOMICS: THEORY AND APPLICATIONS (25555)



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Ottensooser

10873305, Si vasubramanian

10856817, Bergamin

10682336, Lambides

19779559


Figure
3

CPI

The overall effect of expansi onary fiscal and monetary policy has
resul ted

i n a

GDP growth rate of 0.9% i n
Dec09 quarter from
-
0.8% i n Dec08
(ABC News, 2010)
. Accordi ng to

Treasury Reports
, wi thout the sti mul us
the economy woul d have contracted at a rate 0.7%
(Gi tti ns, 2010)
.




MACROECONOMICS: THEORY AND APPLICATIONS (25555)



12

Ottensooser

10873305, Si vasubramanian

10856817, Bergamin

10682336, Lambides

19779559

7

THE RBA’S AUGUST DEC
ISION


The RBA must use monetary pol i cy to address the fol l owi ng consi derati ons:


L
i mi t
i ng

“c
onsumer pri ce inflation
[to]

between 2
-
3%;
t
he stabili ty of the Australian currency;

t
he maintenance
of full employment wi thin
Australia; and

t
he economi c prosperity and welfare of the Australian people”

-

(Reserve Bank of Austral i a, 2007; Reserve Bank Act , 1959)

The pri mary goal of monetary policy, si nce 1993, is to mai ntai n stabl e price l ev
els

(Reserve Bank of Australi a,
2007)
. Thi s must be balanced agai nst the goal of “economi c prosperi ty” and “ful l empl oyment”. Together,
these goal s have been i nterpreted as maxi mi si ng sustai nabl e economi c growth, wi th the req
ui rement for
“sustai nabili ty” encompassi ng consumer pri ce i nfl ati on.

As such, all monetary poli cy decisi ons, i ncl udi ng the August 2010 decisi on not to
rai se i nterest rates above
4.5%
, must
have
be
en

made i n l i
ght of the above consi derati ons i n order to be
val i d.

7.1

SUSTAINABLE ECONOMIC

GROWTH

Secti on 3.2, above, discussed the rel ati ve strength of Australia’s GDP growth, as shored up by mi ni ng exports,
i nvestment, i ncreasi ngl y posi ti ve consumer senti ments and government expendi ture (see secti on 4, above).

As s
uch, and i n consi derati on of the predi cted hi gh rates of growth for the next few years
, the reserve bank
does not real l y have to use monetary pol i cy as an

expansi onary economi c tool.

R
edu
ci ng i nterest rates woul d act strongest on consumpti on spendi ng

(due to reduced mortgage costs
i ncreasi ng
di sposabl e

i ncome
)
.
Consumpti on i s al ready on a steep ri se, wi th i n
creased consumer senti ment
sai d to transl ate i nto even hi gher consumpti on i n the next year or so
.
Consumer spendi ng has i ncreased by
0.7% and
ho
usehol d

spendi ng by 1.1% i n the Dec 09 quarter si nce the recessi on.

As such, thi s
woul d be over
-
sti mul ati ng the
consumpti on component of the GDP, potenti al l y creati ng i nfl ationary pressures.

Consumpti on spendi ng has experi enced a modest i ncrease, despi te a hi gher l evel of househol d savi ngs and
l ow credi t growth. Most economi sts expect that domesti c demand wi ll i ncrease over the next twel ve months,
but gi ven the current cauti ous senti ment, kee
pi ng i nterest rates on hol d may encourage posi ti ve i nter
-
temporal substi tuti on. Si mi larl y, the current monetary stance coupl ed wi th the stabi li zati on of busi ness credi t
shoul d encourage i nvestment and devel opment i n li ne wi th the expected i ncrease i n dema
nd. The l abour
market has pi cked up, wi th unempl oyment falli ng to 5.1% i n June and average work hours have i ncreased,
al though l evel s are sti l l far from those reached i n 2008.

Further, a decrease i n the i nterest rates woul d also reduce Australi a’s i nter
est rate di fferenti al, potenti all y
reduci ng
forei gn i nvestment i n Austral i a by
reduci ng the ri sk
-
free l evel of growth
.

Underl yi ng i nflati on had conti nued to fall to 2.75% bel ow 3% for the fi rst ti me i n three years, and is now wi thi n
the RBA’s target band.
The CPI i s at 3.1%, whi ch i s partl y due to the i ncreases i n tobacco taxes earli er this year
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and mai ntenance pri ce of utili ti es. Thi s rate
is expected to remai n steady over the next twel ve months whil e

underl yi ng i nflati on is expected to i ncrease to 3% due
to suppl y constrai nts bei ng reached wi th the expansi on
of the resources sector.


Due to these i nflati onary pressures reduci ng the RBA’s cash rate woul d not have been
a l ogi cal choi ce.

Despi te the Bank’s expectati ons for gl obal growth to be about trend for

the comi ng year, expansi on has been
uneven. Most advanced economi es have experi enced moderate rates of growth, and key economi c i ndicators
suggest that Chi na is shi fti ng to a more sustai nabl e rate of devel opment. However the overall strong growth i n
Asi
a and Lati n Ameri ca has l ed to an i ncrease i n the pri ce of Australi a's two l argest exports, i ron ore and coal.
As a resul t, terms of trade have agai n risen to the hi stori call y hi gh l evels experi enced i n 2008 and economists
expect thi s to be sustai ned over

the next few years.

7.2

MAXIMUM EMPLOYMENT

Unempl oyment, though reduci ng from i ts al l
-
ti me hi gh of 5.8%
(The Australian Bureau of Stati sti cs, 2010)

October 09 to 5.1% i n June 10
(The Australi an Bureau of
Statistics, 2010)
, is sl owl y recoveri ng (wi th
approxi matel y 200,000 jobs bei ng added to the workforce i n si nce last August).

Thi s may
be expl ai ned by the
hysteresis
4

brought about by the
pro
-
cycli cal nature of output and parti ci pati on rate
,
and

labour

producti vi ty

ke
epi ng the unempl oyment rate

up i n spi te of the i ncrease i n i ncome
.

Whilst reduci ng the i nterest rate mi ght i ncrease empl oyment, the unempl oym
ent rate i s l ow enough, and
cl ose enough to the natural rate of unempl oyment, that targeti ng thi s w
i th monetary poli cy woul d have
di mi ni shed returns, and woul d di rectl y i ncrease i nfl ati onary pressures.

7.3

EXTERNAL STABILITY

External stabili ty is a secondary
goal of the RBA’s monetary policy.

Australi a’s relati vel y sound external
stabili ty (excl udi ng her m
assi ve pri vate i nternati onal debt)
: a hi gh Australian doll ar, i ncreasi ng terms of trade
and
growi ng
net exports

(see s3.3.3 above)

woul d be i nappropriate
l y

targeted

by monetary pol i cy
.

The goals of monetary poli cy are cl earl y deli neated. There i s hi gh, al
most peak non
-
i nfl ati onary growth, the
unempl oyment rate i s falli ng as the parti ci pati on rate is i ncreasi ng and Australia is enjoyi ng record external
stabili ty
. As such, the RBA’s deci si on to keep
cash
-
rates as
-
is is sound
, protecti ng current growth
wi thout
addi ng i nfl ati onary pressure.






4

Hysteri s i s c
ycl ical unempl oyment becomi ng l ong
-
term unempl oyment or a reducti on of the parti ci pation rate
vi a deski l l ing or
workers no l onger “wi l l i ng” and “acti vel y seeki ng” empl oyment
.

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8

CONCLUSION


Evi dentl y, there are a mul ti tude of factors that determi ne Australi a’s current rel ati ve economi c stabili ty. Thi s
report pri mari l y i denti fi ed that Australia was abl e to avoi d bei ng
undul y affected by

the
gl obal economi c
recessi on due to
i ts

government expendi ture bol steri ng consumpti on, and a heal thy export
sector

bolstered

by
i ncreasi ng commodi ty pri ces
. These factors have l ed to Australi a’s economi c resurgence l eavi ng Austral ia i n a
good posi ti on to l ead

the gl obal economi c recovery.

This

report stresses a neutral monetary stance will
benefi t the Australian economy as i ncreasi ng the cash rate may si mmer Australia’s feel consumpti on demand
whi lst a reducti on i n the cash rate coul d see the
reappearance

of

i nfl ati onary pressures.

Mai ntai ni ng the cash
rate served the RBA’s goal s, and are, thus, a reasonabl e response

to the economi c cl i mate
.


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