The Macro Economic Policies Of Australia

The Macro Economic Policies Of AustraliaAustralian g everyplacenments over precedent decades have convention lone(prenominal)y aimed towards including triangular objectives of financial growth, internal poise, and external poise within framework of single economy. (DORNBUSCH, Rudiger, 2006) Collectively, these trio set of objectives aim towards sustaining caseized financial growth while retaining inferior inflation as soundly as limiting the mass of overseas debts and liabilities. Several researches conducted in concerned field have revealed that there is no consistency in level of scotch growth though it is influenced greatly by fluctuations of multi internal business cycle. (DORNBUSCH, Rudiger, 2006) A government activityal macro scotch man maturement is referred as an attempt to minimize the impact of international business fluctuations by controlling demand to facilitate sustained growth together with inferior inflation and unemployment.In the last decade macro frugals f orm _or_ system of government in Australia has been directed at controlling inflation as it would be associated with macro sparing stability and growth.Fol sufferinging on from the GFCs the governments main emphasis of macroeconomic insurance has been exhausting to avoid a recession.Contrast these two phases of polity. Explain how macroeconomic indemnity objectives, targets and instruments have differed.Explain how macroeconomic insurance polity objectives, targets and instruments have differed.Outline the experiences of the Australian thriftiness over the last 10-15 historic period making use of macroeconomic aggregates these may be presented in summaries of tables and/or graphs. Stress should be placed on the ch completelyenges face up insurance insurance makers at present and handlely ch completelyenges.Before the global economic crisis (GFC), the Australian economy has seen signifi plentyt growth in terms of GDP ignoring several(a) crises that have affected the global economy such as the Asian financial crises (1997-1998) and the United States (US) dot com bust (2000) (reference). Throughout this time, Australian macroeconomic policy (MP) has earlier been directed at controlling inflation to aver stability and growth. MP refers to the structure, performance, behaviour and decision making of a whole economy. (Reference) states that MP is associated with the examine of aggregates such as gross domestic product (GDP), price indices and unemployment directs to examine how the economy functions.Macroeconomic policyThe continuance of a steady economic environment in Australia post GFC has proven to be a difficult task, with the surfacing of undesired inflation and external calculate pressures (Treasury, 2008). According to Treasury (2008) acts of policy to tackle such pressures has consistently contributed to short-term downturns and, unavoidably, cons fixed the prolonging of economic growth. The basis of the core, however, is the policy failu re which permitted the pressures to appear. Nevertheless, the resulting replaces in the economic outlook would affect the self-assurance of businesses and consumers and their bent to engage in the process of structural change. Moreover, disparity in fiscal policy and hesitation some inflation predictions has lead to higher real amour group scores, discouraging investment and distorting investment patterns.In the last few years substantial progress has been made in addressing inflation and to a lesser intent current account deficit constraints (RBA, 2009). The current cycle has been characterised by low inflation, with monetary policy be carried out on a more strategical basis with the desire to keep headway inflation consistent with the Reserve Bank of Australias (RBA) average target range of 2 to 3 per cent over a yearly cycle.Last year the Government introduced a new framework for the conduct of policy, clearly recognising the Reserve Banks role and endorsing its infla tion objective. The clarification of policy responsibilities, and recognition of their observance in practice over time, together with an accumulating record of low inflation, is likely to have a continuing positive impact on disdaining inflation expectations and creating confidence in a sound investment environment.Australias large structural current account deficit reflects both inadequate national saving and inadequate investment returns overall (ABA, 2009). On the saving side, the principal cause is a deficiency in public saving especially at the Commonwealth level. The Government through its financial consolidation program is addressing this paradox and has put in place a policy framework that will maintain the adequacy of the Commonwealth contribution to public saving. Statements 1 and 2 spell out in detail the fiscal strategy, including improved transp arncy and accountability practices, and instruction execution of the strategy in the years ahead. The benefit of a more s oundly based fiscal policy is likely to be seen over time in the capacity of the economy to sustain faster rates of growth than would former(a)wise be the case. While it is too early to be able to patch to some(prenominal) concrete results with confidence, the 1997-98 economic outlook presented in Statement 2 suggests that higher saving in prospect next financial year will succor to constrain the current account deficit.Before the global economic crisis of 2007 the Australian economy sustained increased economic growth of approximately 8% per annum take away for the year 1997-1998 (Asian financial crisis) (The Australian Year Book 2008). This resilience reflects on well-timed monetary and fiscal policy responses strong demand from various study trading partners, such as China increased tribe growth that aided demand in the domestic economy and the robustness of the financial sphere of influence (The Australian Year Book 2008). More chiefly, Australias strong economic perfor mance loafer be commended by decades of economic reform in economic policy, regulative frameworks and governance. These have increased the flexibility of the economy, and strengthened its ability to withstand unforeseen circumpostures.Dungy and Pagan (2007) suggest that aggregate behaviour exists between fiscal policies and is connectedSince 1997/98 the federal budget has been in surplus continually, apart from a very small deficit in one year. The governments net debt has been retired. Gross debt on issue is maintained at a small size in order to facilitate a functioning bond commercialize so as to release efficient risk pricing more generally. As with monetary policy, there is a medium-term framework for fiscal policy emphasising balance over the business cycle. there is much less inclination today than there once was to use fiscal policy as a counter-cyclical stabilisation tool.Signifi dejectiont fiscal challenges in the long-term include health spending and responding to creation ageing, as the very important work by officers of the Australian Treasury has made clear.Macroeconomic policy has a supportive and complementary role in providing a stable economic environment conducive to sound investment decisions by business and to advance workers to invest in upgrading their skills to take advantage of new employment opportunities.Macroeconomic aggregates argon aggregative behaviour relationships between economic aggregates such as national income, government expenditure and aggregate demand. For example, the consumption function is a relationship between aggregate demand for consumption and aggregate disposable income.Models of aggregate behaviour may be derived from direct observation of the economy, or from models of individual behaviour. Theories of aggregate behaviour atomic number 18 central to macroeconomics.Aggregate demand aggregate demand (AD) is the summarize price for demand for final goods and services in the economy (Y) at a given time and price level 1. It is the amount of goods and services in the economy that will be purchased at all possible price levels.2 This is the demand for the gross domestic product of a country when inventory levels are static. It is often called effective demand, though at other times this term is distinguished.It is often cited that the aggregate demand deform is downward sloping because at lower price levels a greater bar is demanded. While this is correct at the microeconomic, single good level, at the aggregate level this is incorrect. The aggregate demand curve is in fact downward sloping as a result of three distinct effects Pigous wealth effect, the Keynes interest rate effect and the Mundell-Fleming exchange-rate effect.Aggregate expenditure is a measure of national income. It is a way to measure the GDP or Gross Domestic Product (A measure of the level of economic activity). It is defined as the value of planned goods and services produced in an economy.GDP is calculated by the formula C + I + G + NX and I = Ip + Iu (planned + unplanned investment), Aggregate Expenditures is defined as C + Ip + G + NX, whereC = Consumption Expenditure (Also can be written as CE)I = InvestmentG = Government spendingNX = Net exports (Exports-Imports)Aggregate supplyAggregation problemEffective demandSavingGovernment Macroeconomic goals gamey and stable economic growth ratesLow unemploymentLow inflationStable and manageable Balance of PaymentsRBA articleRBA uses short term interest rate as its operating instrument for implementing monetary policy.RBA sets target level for its immediate payment rate.RBA has two optionsIt can target particular level of bank reserves and fill the resulting outcome for short term interest ratesIt can seek to achieve a particular target level for short-term and supply some(prenominal) quantity of services is demanded at the target rate.For a given demand curve for reserves the RBA will need to alter the supply of bank reserves to implement a change in the stance of monetary policy.While banks continue to hold reserves with the RBA these reserves are associated with settlement in the payments system. In addition the RBA pays interest on reserves which is consociateed to the cash rate.An important effect on the current operating procedure is the relationship between the quantity of reserves and the level of the policy rate. financial policy operating procedures is based on the supply of and demand for some measure of the capital supply.Systematic changes to the stance of monetary policy need to be implemented by changing the supply of bank reserves. substitution banks can influence the stock of bank reserves by undertaking open market operations either directly with the banking system or with the non-bank public.A central bank is unable to independently cast both the quantity of bank reserves and their price.To understand how the RBA achieves its target for the cash rate it is necessary to bet the operation of the p ayments system in Australia and the overnight cash market.In Australia the study players in the payments system are the nonbank public (households and firms), the private banks, the RBA and the federal government.The trend in unemployment in the most late(a) decade has generally been downward. Following a rise of a percentage point in the economic slowdown in 2001, it has fallen to the lowest levels since the mid 1970s. The long expansion, with occasional(prenominal) temporary pauses, has done a lot to foster lower unemployment. But the changes in labour market arrangements over the past 20 years or so have also been very important. Indeed, I would argue that they are a key contributor, not least because they have facilitated the longer length of economic expansions.http//www.bis.org/review/r080516b.pdf?noframes=1Firstly, as is widely accepted, tax systems must be fiscally sustainable across the economic cycle. Secondly, while monetary policy is the principal instrument of macroec onomic management, it is still necessary to remain mindful of the short-run liquidity effects of fiscal policyThe challenges associated with an aging population identified in the Intergenerational Report have prompted the Howard Government to establish a long-term strategy to put fiscal policy on a more sustainable footing. Central here was the creation of an independently managed Future Fund in 2006 to help meet the costs associated with Australias aging population. The primary goal of the Future Fund is to lay away adequate capital to meet the Commonwealths unfunded $91 billion superannuation liability so that it does not burden future generations. The Future Fund has been capitalised from a number of sources including asset sales, special seed funding (designed in part to preserve sovereign debt markets) and budget surpluses from the governments cash account. While the Future Fund is primarily about fiscal sustainability rather than stabilisation per se, it is important to note that the structure of the Future Fund and the allocation of surpluses to it do have some important implications for the stabilisation debate. The significant point here is that the Future Fund represents an innovative vehicle in which cash surpluses can be invested without stimulating short-run consumption.Overall recent Australian fiscal policy has been consistent with the objectives set out in the Charter, in that fiscal policy is clearly being conducted on a sustainable basis with significant financial resources now being invested in the Future Fund.What is less clear, however, is the impact of this policy on the goal of macroeconomic stabilisation and whether the challenges shortly confronting the Australian economy may require more careful consideration of the impact of fiscal policy on short-run economic activity.Given the governmental sensitivity of the issue and the RBAs understandable reluctance to speak outside its official mandate, the central bank has not been willing t o provide the government with explicit advice on fiscal policy. Indeed the new RBA Governor, Glenn Stevens, attempted to down-play the issue at a February 2007 Parliamentary Committee hearing when he stated that it was unlikely any pick spending spree would have enough short-term impact to enter into the RBAs interest rate deliberations (Wood 2007).Activist fiscal policy of the Keynesian golden age may well have passed, with monetary policy now established as the primary instrument of macroeconomic management. Yet this does not regard as that we can completely ignore the stabilisation function of fiscal policy which Musgrave described almost half a century ago. This is especially so when, as in the case in Australia at present, key sectors of an economy are running at close to full capacity and inflationary risks are building. Under these muckle fiscal policy must not only be sustainable, it must also be sensitive to its potential to stimulate demand in the short-run. Fortunatel y, for the Australian economy it seems that there is an awareness of the need to exercise a degree of fiscal restraint in the prevailing conditions with both major parties.http//eprints.utas.edu.au/3970/1/3970.pdfChallengesAustralias population is projected to reach nearly 36 million by 2050 an increase of around 14 millionThe first challenge is that an ageing population implies sulky economic growth. As the proportion of the population that is of traditional working age falls, the labour force participation rate is projected to fall (from above 65 per cent today, to below 61 per cent over the next 40 years), dampening workforce growth.Population dynamics explain one-half of the 0.4 percentage point gap between annual growth in GDP per capita over the next 40 years relative to the past 40 years the other half being due to a technical assumption relating to productivity growth.The second challenge is that working Australians will need to support an ageing population that, in part due to continuing technological advancements, is likely to be living longer. Men aged 60 in 2050 are projected to be intimate an average of 5.8 years longer than someone aged 60 today, while women aged 60 in 2050 are projected to live an average of 4.8 years longer.This is great news for Generation Y, but a sobering statistic for future budgets.The greater publicly funded health, aged care and related expenditures to support Generations X and Y in their retirement years will need to come from a relatively smaller number of workers than we have today. On a no policy change basis, a significant fiscal gap is projected.The intergenerational report shows how the Governments fiscal strategy to constrain real expenditure growth contributes to reducing, without wholly eliminating, the projected fiscal gap.The third challenge identified in the intergenerational report concerns the impact of climate change on ecosystems, water resources, agricultural production and weather patterns.Against these challenges, there are three topics I want to say something about todayPromoting economic growth by improving productivity and workforce participationThe implications of a ontogenesis population, particularly for infrastructure investment andMedium-term prospects for capital flows required to finance national investment.For obvious reasons, I wont be saying anything about climate change on this occasion.Discuss the concept of instruments and targets in macroeconomic policy and assess how this concept of instruments and targets in macroeconomic policy and assess how this concept might be applied to the current policy framework in Australia.A number of people have asked me for clarification on instruments and targets as referred to in assignment 2. present is what I meanThese refer to macroeconomic policy.INSTITUTIONS make policy. Examples would be the Reserve Bank of Australia and the Treasury.These institutions set policy TARGETS. An example of such a target would be an annua l inflation rate of no more than 3%.Policymakers then use policy INSTRUMENTS to meet the targets. Typical instruments include the RBA cash rate or government spending.Show how the economic theory you have l securet can be used to explain current macroeconomic policy.How is inflation measured?GDP DeflatorConsumer set Index an average of the prices of the goods and services purchased by the typical urban family of four.Producer Price Index An average of the prices received by producers of goods and services at all stages of the production processfiscal and monetary policyThe tools the Australian government controls to smooth short-run fluctuations in the economyinflation, unemployment and external tradeThe causes and effects of inflation, the link between inflation and unemployment, Australian trade with the rest of the worldFiscal policyFiscal policy is the government operation of government spending (G) and taxes (T).typically we consider the problem of how the government can manip ulate G and T so as to control economic variables such as output, inflation, interest rates, and so forthIssues how fiscal policy can stabilize the economy? what about government borrowing and public debt?Budget deficit the budget deficit is the extent of overspending by the governmentBudget deficit = G TExpansionary fiscal policy increasing the budget deficit (G or T) usually in a recession.Contractionary fiscal policy decreasing the budget deficit (G or T ) usually in an economic boom.Budget deficits and surplusesIf the government spends more than it brings in in taxes, what happens? (G T)The property has to come from somewhere. For developed countries, this means borrowing (issuing government debt or public debt) from domestic residents or foreigners.If the government is spending less than it brings in in taxes, the government can reduce public debt. The Australian government has followed this policy in the last 10 years.Types of fiscal policyWe differentiate two types of fisc al policyDiscretionary fiscal policy This is fiscal policy that comes about from planned changes in G and T that the government brings in response to the economic situation.Non-discretionary fiscal policy This is fiscal policy that comes about from the design of spending and taxes. There is no government official actively determining these changes.Non-discretionary fiscal policyCertain parts of our spending and taxes automatically increase demand in a recession (when AD potential GDP) and decrease demand in a boom (when AD potential GDP).Welfare spending and unemployment benefits are part of G and increase in a recession and decrease in a boom.Income and company taxes are part of T and depend on GDP, they increase during a boom and decrease during a recession.These act as automatic stabilizers on the economy, reducing the variability of the economy.cyclically-adjusted budget deficitsThe automatic stabilizers raise the budget deficit in a recession and lower the budget deficit in a boom.This fact means that we can not just look at the budget deficit to determine whether the government is overspending, we also have to take into account where we are in the business cycle.Adjusting the budget deficit for the point we are in the business cycle is called cyclically adjusting. We would expect even a sensible government to be in a deficit in a recession.Discretionary fiscal policyDiscretionary fiscal policy is the manipulation of G and T by government officials typically to reduce the severity of shocks to the economy.It sounds like a good idea, but how does it work in reality?There are galore(postnominal) problems and limitations to the use of fiscal policy to reduce recessions and booms.Problems with discretionScenario Imagine a train driver that has only one control- an accelerator/brake that he or she can push or pull on to control the train. This is exactly the same situation as the government faces with fiscal policy.Now what limitations can the train driver face?Problems with discretionLimitationsCorrectness of data Is the train driver seeing the tracks correctly? Or Does the government get the right data about where the economy is?Timing of data Is the train driver seeing the tracks with enough time to react? Or Does the government get the statistics quickly enough to do anything?Decision lags Can the train driver make a decision about the correct action before the train reaches the problem spot? Or does the government have time to design the correct fiscal policy?Problems with discretionAdministration lags If the driver pulls on the control, how long will it take for the halt to skip to work? Or New spending and taxes have to be passed through parliament, which takes time, even after a decision is made.Operational lags If the brakes start to work, how long before the train slows down? Or New government spending and taxes take time to affect the economy.So even the best-designed fiscal policies can go wrong if they are in response t o the wrong data or if they take too long to affect the economy.Political considerationsThere are further concerns we might have about the operation of fiscal policy.Politicians have to remain popular. No one likes taxes, and everyone likes new spending on themselves. Will a politician make an unpopular decision that may result in them losing the election if it is the best decision for the economy.Electoral cycles Governments have to be re-elected every 3-4 years. So a politician would love to engineer a boom right before his or her election.Crowding outAnother problem with fiscal policy is that an increase in G may increase output but at the expense of other components of aggregate expenditure.Y = C + I + G + NXSince the economy returns to potential GDP over the long-run, an increase in G must come at the expense of either C, I or NX or all 3.If an increase in G reduces investment spending over the long-run, this could lead to lower future growth in the economy.Crowding outHow can this happen?An increase in G shifts the AD curve to the right.This results in higher Y and higher P.The increased government borrowing in the market for savings raises the interest rate. high schooler interest rates lead to lower investment spending so I drops, shifting AD left.Higher interest rates leads to an appreciation of the A$ (as foreign investors put their gold in Australia), so NX drops, shifting AD left.Crowding out- I and NXGovernment debtOne problem that economic commentators always point to is the level of government debt- Our debt is too high.How do we evaluate the level of government debt? How do we know is it is too high.Government debt is like any other form of debt. You evaluate the debt relative to the income/wealth of the person incurring the debt.A $500,000 debt might be high to you and me, but it might mean nothing to Kerry Packer.Government debtSo we need to evaluate government debt relative to government income. But what is the appropriate form of governmen t income, as the government doesnt earn or produce anything.Generally we use the income of the country as the comparison, since the government is free to tax or claim any part of GDP.Government debtSo our criterion for too much is debt (B, since typically government debt is issued in government bonds) over GDP (Y)B / YBanks would make much the same calculation when considering whether to issue someone a home loan.In general debt is growing at the rate of interest each year, r, while GDP is growing at the growth rate of the economy, g.Monetary policyFirstly, monetary policy uses the level of interest rates to influence the economy in the short to medium term. Its major goals are to stabilise demand and inflation in the medium term and inflationary expectations and to achieve the governments objectives of sustainable growth with underlying inflation of about 2-3%. ascendant Chapter 12 of the book plus second part of Module 3.Monetary policy is the government operation of the money sup ply and interest rates.Typically we consider the problem of how the government can manipulate monetary policy so as to control economic variables such as output, inflation, interest rates, etc.Issues how monetary policy can stabilize the economy? how will monetary policy affect interest rates or exchange rates?Who operates monetary policy?The Reserve Bank of Australia (RBA) is responsible for monetary policy.The RBA was given 3 goals when it was createdMaintain low inflationMaintain low unemploymentMaintain value of the A$The RBA was only given one policy tool- the money supply to achieve 3 goals. In the mid 1990s, the RBA was simply told to have one aimMaintain low inflation.DefinitionsThe RBA implements monetary policy through its control of the cash rate.Cash rate The cash rate is the rate the RBA charges bank for loans within the RBA reserves system. The cash rate is the base interest rate for the economy, and all other interest rates are derived from it.Easy monetary policy Whe n the RBA lowers the cash rate to stimulate AD. close-fitting monetary policy When the RBA raises the cash rate to cut off AD.Interest ratesAs we saw in the Investment section, the profitability of investment projects depends on the nominal interest rate.The lower are interest rates, the more projects will be profitable, so the higher will be investment spending.Since the RBA controls the cash rate, and since all interest rates depend on the cash rate, the RBA controls I, and so can shift the AD curve.How monetary policy worksCause-Effect Chain of Monetary PolicyMoney supply impacts interest ratesInterest rates affect investmentInvestment is a component of ADEquilibrium GDP is changedMonetary policy and the open economyNet Export EffectChanges in interest rate affect the value of the exchange rate under aimless exchange rate.An increase in interest rate appreciates the currency, resulting in lower net exportsA decrease in interest rate leads to currency wear and tear and a rise in net exportsSo an easy monetary policy is enhanced by the net export effect.Quantity theory of moneyThere is a nice, simple model of money which explains many features of money supply and demand. This model is called the quantity theory of money.If we imagine that money is needed for all of the purchases made each year, then demand for money is the vale of purchases PY.The supply of money for purchases is the amount of cash in the economy.But each piece of money in the economy can be used multiple times during a year in transactions. We call the number of transactions the velocity of money v.Quantity theory of moneySo the total supply of money for transactions in a year is v times M vM.So demand equals supply requires thatPY = vMSo if Y goes up, but nothing else does, then average level of prices must fall.The QTM is good to use for thinking about money and inflation.UnemploymentA person becomes unemployedJob loserJob leaverNew entrant or re-entrant into the labour forceHe or she is no longer unemployedHired or recalledWithdraws from the labour forceLabour force participation rateUnemployment rateTypes of unemploymentThree main types of unemploymentCyclical unemploymentFrictional unemploymentStructural unemploymentCyclical unemploymentAssociated with the ups and downs of the business cycleTakes place due to insufficient aggregate demand or total spending- reflects shifts in AD curve.High during recessions and low during booms.Fiscal and monetary policies can reduce cyclical unemployment policies are relevant.Frictional unemploymentAssociated with the period of time in which people are searching for jobs, being interviewed and waiting to commence duties.It is inevitable and always existFiscal and monetary policies can not reduce frictional unemployment macroeconomic policies are irrelevant.Policies that make it easier to honour new jobs will affect