Monetary Policy Will Influence The Australia Economy

The main benefit of low interest rates is its stimulating effect on economy. The BoE can help start businesses spending on goods which helps the economy in the long run and can help consumers to spend more on durable goods. Also the consumers’ demand for products will increase. This will force the firms to try to meet the demands by hiring additional workers which in turn will reduce the unemployment rate.

To begin, the article explains the Federal Reserve’s plan to take a careful approach to enacting contractionary monetary policies, policies used to decrease money supply, in the future. Last December the Federal Reserve raised the interest rates after they had been near zero for years to ensure inflation was kept in check and to promote economic growth. It appeared the economy would be in for another increase in the interest rates sometime this year, but the Feds have rethought that strategy. If the Federal Reserve were to continue to raise interest rates it would have short-run and long-run effects on the Money Market, Goods and Services Market, Planned Investment, Phillip Curve, and Aggregated Supply and Demand. These effects are aspects that have to be considered because they express and explain the effects the increase in interest rates has on the economy and explain if the Federal Reserve is enacting the correct policy to achieve their goal.

Most people don’t understand Economic growth or what takes place in the economy with regard to inflation, unemployment, or interest rates. These things are all regulated by the central bank called the Federal Reserve System. The tope covered in this paper is the monetary policy which is the policy that decides if unemployment, interest, and inflation decreases or increases. The Monetary policy decides what price a person pays for an item at the store, how much interest a person will get charged on a loan for a car. This is something most people consider, most just look for the best price point or look where their money can go the farthest.

Central banks using contractionary monetary policy have many tools to help reduce inflation. Most commonly it is selling securities and raising interest rates through open market operations. Avoiding a recession and lowering unemployment is undertaken by expansionary momentary policy, interest rates are lowered, securities from member banks are purchased and other ways are used to increase the liquidity. “The Fed uses three main instruments in regulating the money supply: open-market operations, the discount rate, and reserve requirements. The first is by far the most important. By buying or selling government securities (usually bonds), the Fed—or a central bank—affects the money supply and interest rates.”

It is said that we are living in turbulent times. The Australia’s once-in-a-century commodity boom has reversed, leading many miners to cut back on investments and consolidate; which is expected to generate great social and economic hardship throughout these years. While more hope is casted into the construction sector, a cooling change blows in the housing market. Unemployment is tipped to rise and when it reaches a record high; consumption will continue to grow at a below-average pace, so business sentiment will remain fragile. Rather than fuelling the economy, the fiscal policy keeps straining it whilst the monetary policy will struggle to have an impact – indicating that the Australian economy is slipping downwards.

The Federal Reserve monetary policy exists to accomplish the goals of their dual mandate, maximizing employment and keeping prices stable. To accomplish these goals, monetary policy either changes the interest rate, namely the federal funds rate, or the money supply. Before carrying out these policies, the Fed considers economic data such as the trends in the CPI which describes the average level of inflation and various trends in the labor market . Through monetary policy, the Fed is also responsible for fighting recession. To do so, the Fed decreases interest rates but only to a certain point because nominal interest rates cannot go below zero. Therefore, it is important that the Fed return the federal funds rate back to its neutral rate before the next recession begins .

Macroeconomics stability is important and it plays a critical part for the nation involved and the global community, this is why the government will sometimes use monetary policies to manipulate or stimulate the economy depending on its state. When there is a need to increase cash in the economy, the central bank or the Federal Reserve will buy government bonds and by doing so, it would cause interest rates to go down. (Investopedia.com, 2015) “Demand for goods and services will rise and, as a result, output will increase. In order to cope with increased levels of production, unemployment levels should fall and wages should rise”.

When the Fed increases the federal funds rate, it is to pursue contractionary monetary policy, which limits the banks’ ability to lead money to consumers and companies (Investopedia, 2015). The goal of the contractionary monetary policy is to reduce the rate of goods and services. Another way to look at it is, if the Fed lowers rates too much, to maintain a healthy economy, it leads to a lower unemployment rate, which can encourage inflation. If the Fed raises rates too much it can lead to a higher unemployment rate and inflation remains inactive (Investopedia,

In order to reduce inflation the Australian government has traditionally implemented both contractionary fiscal and monetary policy. This would involve an increase in taxation or reduced government expenditure as well as increases in the official cash rate which would lead to a rise in interest rates in the economy to contain aggregate demand.

Official interest rate changes will also influence asset prices. For example, bond prices are inversely influenced by long-term interest rates. Finally, the official interest rate will also affect the exchange rate which the paper defines as “the relative price of domestic and foreign money” (George et. al, n.d.). When the official interest rate rises, domestic currency (the GBP) will see appreciation making investors want to invest in pounds. Another key point is that with changes in the exchange rate, there will also be a change in the value of domestic and foreign exports and imports. Finally, a change in the official interest rate can also affect people’s expectations and confidence in the economy. For example, some may believe that an increase in interest rates is a signal that the MPC thinks that the economy is expanding thus making further growth likely or, a contradictory interpretation may be that the MPC thinks that the MPC may need to slow growth in order to control inflation (George, n.d).

On the contrary, the government can increase spending if a recession is close or already happening and can lead to increased employment nationally. The central bank’s monetary policy can help by varying interest rates. They can lower interest rates to increase spending and raise them to decrease spending. To decrease inflation, the banks can reduce the supply of money, therefore giving citizens the incentive to spend less money and in turn, reducing the inflation.

(RBA)The S&P/ASX 200 reached a dramatically low point of 3,120 point,with share prices of banks sharply declined. Australian households cut off their income on durables, such as furniture and cars, postponed the replacement and used their existing furniture or cars instead. Given the depreciation of US dollar, the Australian dollar also depreciated rapidly as the crisis expanded, decreasing by over 30 per cent from its peak.(RBA) The depreciation of the Australian dollar has affected international transactions,in particular, the increase in export. Under the circumstances, the Australian government has prompted RBA to enhance liquidity. As the policy progressed, the Australian dollar has recovered since 2009, reflecting the prudential regulations and the resilience of the Australian

This essay investigates the possible decision of Reserve Bank of Australia (RBA) about cash rate to be made on 5 May 2015.The appropriated level of cash rate depends on the current economic conditions, both domestically and internationally. Also, it will be based on the three main objectives of monetary policy including price stability, full employment and the stability in economic growth. This essay will discuss the current economic conditions which are consistent to the tendency of cash rate that might be cut from 2.5 to 2 per cent in the next meeting. The essay provides three arguments for this possible decision including the decline in in business investment and business confidence, low commodity prices and the economic growth in major

“Monetary policy is the process of supplying nominal money, look after the availability of money and cost of interest rate, which is controlled by the government or central bank, can be rather an expansionary policy, or a contractionary policy.” The expansionary policy is adopted to increase the whole amount of supply of money in the economy, and a contractionary policy is used to decrease the whole amount of nominal money supply. The central bank or government usually use the expansionary policy to fight against unemployment in a recession, where they lower the interest rate, so investment can grow. On the other hand the contractionary policy is

After financial crisis in 2008, inflation of most of the western countries went down dramatically, especially in the Eurozone. Inflation has been below the European Central Bank’s target for a couple of years and is anticipated to remain at a low level in the near future. Such a low level of inflation goes out of most central banks’ goal, contributing to a risk that this situation will lead to a slide into deflation. (Bernoth, Fratzscher and König, 2014). To prevent deflation caused by a financial crisis or to revive economic growth, according to Herbst, Wu and Ho (2014), central banks can use interest rate policy to promote lending by lowering interest rate to encourage economic activity. Central banks can also use money supply policy that central banks pump money directly into the financial market to increase circulating money supply. Today this is known as quantitative easing (QE).