Macroeconomic Patterns And Monetary Policy -Myassignmenthelp.Com

Question: Discuss About The Macroeconomic Patterns And Monetary Policy? Answer: Introducation In the current scenario, a steep fall in the GDP of Australia can be evident in the last two years. Additionally, the increase in the level of unemployment has made it difficult for the Australian Government to manage proper economic balance. The primary reason for the economic downturn in Australia is the downfall in business investment (Tuan, 2012). Moreover, the government budget deficits have become another major issue for the Australian economy. However, Mr. Malcolm Turnbull took several initiatives to cut down government expenditures in all aspects. As a result of the government spending cut down, an unwillingness to invest in the country can be evident after the announcement of the policy. Later on, the Reserve Bank of Australia reduced the cash rate in the country in order to meet the crisis situation and promote business investment in the economy (Reserve Bank of Australia, 2017). It can be seen through the previous data that the Reserve Bank of Australia has kept the offici al cash rate at an historic low level of 1.5 percent for consecutive 13 months. On the basis of the above information, the paper has been developed to answer two major points that are the impact of a fall in the interest rate over the business investment in the nation and the after effect of increase in business investment over the aggregate demand curve, price level and real GDP of the nation. During the period of economic downturn, the Central Banks of most of the nations including different developed as well as developing countries have reduced the benchmark cash rate in order to boost the economic growth and maintain stability in the market. In the same manner, the initiative taken by the Reserve Bank of Australia (RBA) to reduce the cash rate to a historic low of 1.5 percent can be considered as an essential part of the monetary policy of the nation (Reserve Bank of Australia, 2017). According to the Australian Bureau of Statistics (2017), the RBA has trim down the interest rate from 4.25 percent in the year 2012 to 1.5 percent in the year 2016 (Tradingeconomics.com, 2017). On the basis of the interest rate cut in the Australian market, an increase in the flow of money can be seen in the country. A figure has been given below in order to present the previous five years interest rate of Australia for further consideration. Due to the fall in the interest rate, the cost of taking loan will reduce in the Australian market that will enable the entrepreneurs to low interest loans to invest the money in new businesses (Catala?n, Guajardo and Hoffmaister, 2008). Furthermore, the low interest loans will increase the demand for credits that will further leads to increase in the flow of money in the open market. Additionally, the fall in the interest rate leads to a decrease in the return from bank savings (Catala?n, Guajardo and Hoffmaister, 2008). In other words, the interest earned from savings accounts and fixed deposits will decrease due to the fall in the cash rate that will enforce the common public to utilise their money in the form of business investments in place of keeping them in the bank accounts. Hence, it can be seen that the fall in the interest rate leads to increase in the flow of money that promotes business investment in the economy. Furthermore, the fall in the interest rate enables the entrepreneurs to take low interest credits that increase the purchasing power of the consumers. For instance, if an individual gets low interest loans, the price of an asset become cheaper for the buyer (Shaffer, 2017). The buyer has to pay less amount of money as compared to the previous amount with high interest rate. The increase in the purchasing power increases the demand in the market and provides business growth opportunities (Shaffer, 2017). Hence, it can be seen that the fall in the interest rate will increase the aggregate demand in the market due to increase in the purchasing power and enforce the small as well as big entrepreneurs to invest more money in the market. The discussion has revealed that lower rate of benchmark interest rate can increase substantial investments in business in Australia. Assuming the concept, it is required to analyse the impact of increased business investment on aggregated demand curve, Real Gross Domestic Product (GDP), and Price Level in the economy. In the underlying section, the effect of the rise in business investment on the three aforementioned economic aspects has been demonstrated providing a figure. Convincingly, higher business investment due to lower interest rate will certainly increase the monetary flow in the Australian economy. Clearly, higher investment in business will lead to higher income status of the Australian citizens. As a result of the scenario, the purchasing power of the common people will be boosted (Phan, 2014). Evidently, the higher purchasing power of people will mostly contribute towards shift in aggregated demand curve towards the right side. As shown in above figure, the aggregated demand curve will be moved from AD to AD1 pointing to a growth in aggregated demand scenario. Effectively, it can be stated that increase in capital flow and business investment due to lower benchmark interest rate will influence the buying power of the Australian. Hence, the aggregated demand will increase. However, as shown in the above figure, aggregated supply of the economy will be constant in the short-term period at AS. In terms of analysing the effect of higher business investment on Australian GDP, higher aggregated demand will undoubtedly result in an increase in aggregated consumption. Evidently, due rise in consumption of goods and services, the Gross Domestic Product of the economy will be boosted (Scott, Rabanal and Kannan, 2009). As shown in the above figure, the increase in aggregated demand from AD to AD1 has eventually contributed towards increase in the real GDP from Q1 to Q2. For better understanding of the event, another theoretical concept can be demonstrated. Due to rise in flow of capital, common people will receive more money on hand to spend. Hence, rise in aggregated demand will influence higher real GDP of the nation. On the other hand, the impact of the increase business investment on Price Level scenario of the economy will need to be described. According to the theoretical concept of demand and supply, lower benchmark interest rate will mean significant smaller interest on borrowing. Hence, the cost of borrowing will be reduced for the business firms (Cobham, 2015). Inspired by the scenario, the firms will borrow more money from the financial institutions such as banks for business growth and developed. Therefore, the monetary flow in the market will be increased in a massive way. Due to the event, the aggregated price level in Australian economy will significantly show an increase (Fender, 2012). As illustrated in the above figure, an increase in the aggregated demand from AD to AD1 will lead to the rise in the aggregated Price Level of products from P1 to P2. Furthermore, the increased price level can cause rise in inflation as well. The entire analysis has revealed that the decision of the RBA to maintain a lower benchmark interest rate can deliver positive impact on the overall economic status. Certainly, influenced by the lower rate of interest, the firms and business organisations will be encouraged to borrow more money leading towards higher business environment. Apart from that, higher investment in market will provide an increase in the income status of the Australian as well. As an outcome of the scenario, the people will be influenced to spend more and purchase more. Conclusively, the situation will lead to higher aggregated demand, Real Gross Domestic Product, and Price Level of Products in Australian economy. References Catala?n, M., Guajardo, J. and Hoffmaister, A. (2008).Global aging and declining world interest rates. 4th ed. Washington, D.C.: International Monetary Fund, IMF Institute and European Dept. Cobham, D. (2015). Monetary Analysis and Monetary Policy Frameworks: Introduction.The Manchester School, 83, pp.1-4. Fender, J. (2012).Monetary policy. 3rd ed. Chichester, West Sussex: Wiley. Forstater, M. (2016).Economics. 5th ed. London: A. C. Black. Phan, T. (2014). Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different?.Economic Record, 90(290), pp.382-399. Reserve Bank of Australia. (2017).Cash Rate | RBA. [online] Available at: https://www.rba.gov.au/statistics/cash-rate/ [Accessed Oct. 2017]. Scott, A., Rabanal, P. and Kannan, P. (2009).Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts. 3rd ed. Washington: International Monetary Fund. Shaffer, L. (2017).Reserve Bank of Australia keeps benchmark rate unchanged at 1.5 percent. [online] CNBC. Available at: https://www.cnbc.com/2017/04/04/reserve-bank-of-australia-keeps-benchmark-rate-unchanged-at-1-5-percent:-reuters.html [Accessed Oct. 2017]. Tradingeconomics.com. (2017).Australia Interest Rate | 1990-2017 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/australia/interest-rate [Accessed Oct. 2017]. Tuan, B. (2012). Monetary Policy Surprises and Interest Rates: Evidence from Australia.SSRN Electronic Journal.