ECON110 S1 2018 Coursework

By May 19, 2018Academic Papers

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AR-SA

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The report must be no more than three pages in length (excluding graphs, the cover page and a reference list).

Report structure:

Part 1: Background knowledge: what is the role and objectives of the RBA? Using a graph created in a package like Excel, show how the cash rate has changed over time starting from 1990.

Part 2: What are the current domestic conditions you think are relevant for deciding what to do to the cash rate?

Part 3: What are the current external (foreign) conditions you think are relevant for deciding what to do to the cash rate?

Part 4: What is the likely impact of these conditions on the AD curve? (See AD-AS MODEL below)

*Note: to decide this, you need to take all relevant factors in parts 2 and 3 into account and draw only one shift or no change.

Part 5: What is the likely impact of these conditions on the AS curve?  (See AD-AS MODEL below)

*Note: to decide this, you need to take all relevant factors in parts 2 and 3 into account and draw only one shift or no change.

 

Part 6:

Based on the above, what do you think the RBA should do and why?

* Note: here, you should also explain any assumptions that you made to reach your recommendation and any limitations of your recommendation (hint: see notes for parts 4 and 5).

 

 

 

 

 

 

 

 

 

 

Two Stages:

There should be two main stages involved in developing your proposal:

Stage 1:

Think about the current economic data and recent trends (using the sources listed below as a

starting-point) that RBA members would use in making a policy recommendation. The data you consider should include leading economic indicators. At the most basic level, these would include unemployment and inflation rates and the consumer confidence index. Better presentations would also include other indicators of the strength of aggregate demand (such as housing and construction activity, retail sales, exports and imports, strength of foreign economies) and of aggregate supply (such as energy costs and productivity trends).

In examining the data, you should think about what it means by itself and also how it fits in with other data to predict movements in aggregate demand and/or aggregate supply. If, for example, consumer confidence has decreased, you would consider this as a piece of evidence which, alongside other trends you identify, would allow RBA members to predict what might happen to aggregate demand in the future.

Keep in mind that this exercise involves the uncertainty of the real world. For example, if retail sales have been unusually low but domestic investment is growing, then you need to decide what these (opposing) events might mean for future aggregate demand. Keep in mind that there is not necessarily one right answer. In order to make an educated guess, think about all of the different variables and trends that your group considers important before making your decision.

Stage 2:

Think more closely about how the data you have collected impacts the theoretical models we have talked about this semester (e.g. AD-AS and the Keynesian Aggregate Expenditure models). Then use these models to suggest what the central bank ought to do to the interest rate at the next meeting. For example, if you think that the AD and AS curves might move so that output falls below potential, then you might think that the central bank should lower the interest rate with the aim of boosting investment and therefore output.

 

 

 

 

 

 

 

Sources:

ABS Media Releases by Release Date:

http://www.abs.gov.au/AUSSTATS/abs@.nsf/viewcontent?readform&view=mediareleasesbyRelease

Date&Action=expandview

 

RBA Latest Media Releases:

http://www.rba.gov.au/media-releases/

 RBA Minutes –2018:

https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/

 

 

OECD Data: Australia:

https://data.oecd.org/australia.htm

 

(Scroll down the page to Economy)

https://www.budget.gov.au/2018-19/content/individuals.html

 

 

Please use Harvard referencing style using both in-text citations and a reference list at the end of the report.

 

 

 

 

 

 

 

 

AD-AS MODEL

Demand-side variables (AD curve –planned aggregate expenditure on domestic goods and services = domestic output)

•Household spending (C) –(consumer purchases)

•Investment spending (I) –(business purchases on new capital goods)

•Government spending (G) –(public sector purchases)

•Exports (X) –(foreign spending on domestic goods and services)

•Less imports (M) –(domestic spending on foreign goods and services)

Examples of demand shocks leading to an injection of new spending shifting the AD curve right

•Higher profits through better technology raising business investment

•Expansionary fiscal policy leading to higher government spending

•Higher foreign income or weaker exchange rate raising export spending by foreigners

•An increase in wealth from higher house prices or share prices raising household consumption

•A change in expectations leading to more optimism (more confidence) raising spending

Examples of demand shocks leading to a withdrawal of spending shifting the AD curve left

•Higher savings (increased saving ratio)

•Contractionary fiscal policy leading to higher taxation (reducing household after-tax income)

•Stronger exchange rate leading to higher Imports (import spending on foreign goods and services)

•Higher interest rates raising the cost of borrowing, reducing business investment

•An increase in pessimism (less confidence)

Movement versus shifts of the AD curve:

•The above examples lead to shifts of the AD curve

•Changes in the inflation rate lead to movements along the AD curve e.g. an increase in the inflation rate tends to decrease equilibrium output (all else being equal)

 Supply-side variables (AS curve –relationship between output gap and changes in inflation rate)

Examples of supply shocks leading to higher inflation by shifting the AS curve left

•An increase in costs possibly also reducing potential output, caused by:

O higher wages (due to e.g. stronger trade unions)

O higher raw materials prices (e.g. oil)

O higher commercial rents (due to inadequate building construction)

O falling productivity (due to e.g. reduced training and education)

•A decrease in available resources and technology possibly also reducing potential output, caused by: o

O Innovations that make workers and machines less efficient

O A reduction in unemployment benefits resulting in a smaller available labour pool

O Less access to natural resources e.g. through successful campaigning

•Higher inflation expectations.

Examples of supply shocks leading to lower inflation by shifting the AS curve to the right

•A decrease in costs possibly also raising potential output, caused by:

O lower wages (due to e.g. more competition from abroad –globalisation)

O lower raw materials prices

 O lower commercial rents

O improved productivity (due to better technologies)

•An increase in available resources and technology possibly also increasing potential output, caused by:

O Innovations that make resources e.g. workers more efficient

O Social acceptance of more women working resulting in a larger available labour pool

O Greater access to natural resources e.g. water bodies

•Lower inflation expectations

Movement versus shifts of the AS curve:

•The above examples lead to shifts of the AS curve

•Changes in output lead to movements along the AS curve e.g. an increase in output tends to an increase in inflation (all else being equal)

Ask yourself

1.Is the effect ‘good’ or ‘bad’?

2.Do you expect that that the effect will be ‘big’ or ‘small’, significant or insignificant?

3.How reliable are the statistics upon which the analysis is based?