Macroeconomic issue
The instruments of the macroeconomic policies consist of macroeconomic quantities which can be controlled by the economic policy makers. There are presence of fiscal policy instruments and monetary policy instruments. Macroeconomics attempts to examine the problems which affects the economy of a country as a whole. It analyses those problems which cannot be studied with references to an individual product (Brayton, Laubach & Reifschneider, 2014). Therefore, macroeconomics usually affects the economic activity as a whole. It affects the level of employment, general price level, growth of the economy and the balance of payments of the country. Unemployment can be termed as a major macroeconomic issue which is faced by most of the countries in the recent decade.
The government of Australia over the recent decades have always focused towards the objectives of financial growth along with external and domestic poise within the framework of a single economy. These objectives aim towards sustaining nationalizing the financial growth. Studies have also showed that there is absence of any consistency in the economic growth level. The growth of the economy is influenced by the international business cycle (Hanke& Boger, 2018). Macroeconomic management refers to minimization of the impact of the fluctuation of the international business. When demand is controlled in case of fluctuation in business, it will result to sustained growth with inferior unemployment. The policies of macroeconomics have a supportive role for providing a stable economic environment.
Inflation can be termed as one of the key concepts in macro economics and therefore also acts as a major concern for the policymakers, companies, investors and workers. Inflation can also be stated as the erosion in the value of the currency of the economy. It refers to the rise in price across goods and services in the economy over a sustained period of time. Inflation is termed as major macroeconomic issue as it erodes the purchasing power, causes more inflation and raises the cost of borrowing. In this way inflation affects the macroeconomic performance. Inflation can therefore worsen the macroeconomic performance while disrupting the mechanism of exchange in a market economy which is usually decentralized.
Inflation means decreasing the purchasing power of the currency as a result of rise in prices across the economy. Inflation can be measured with the help of consumer price index. When price of goods which are non-discretionary and also impossible to substitute, it can cause inflation. Some of the main causes of inflation includes demand pull inflation, cost push inflation, devaluation, rising wages and expectations of inflation. The inflation of demand pull is resulted due to increasing aggregate demand resulting as a result of spending from both government and private (Hanke & Boger, 2018). Demand inflation also results to economic growth as a result of excess demand. The favourable market condition will also raise investment along with expansion. The cost push inflation is also termed as supply shock inflation resulting from a decrease in the supply which also takes place as a result of natural disaster or increase in the inputs price.
Effects of inflation
There are mostly three types of macroeconomic policies which are policies related to supply side, fiscal policy and monetary policies.
Fiscal policy refers to those policies which causes changes in the expenditure of government and taxation. Government expenditure are also termed as public expenditure. The taxation mainly occurs at two main levels which are national and local. The government also spends money on variety of items which includes benefits for the retired and disabled, health care, education, defines and interest on national debt. In order to reduce the pressure, the government might implement a deflationary fiscal policy. In case of fiscal policy the spending level and the tax rates are usually adjusted by the government for monitoring and influencing the nation’s economy. Changes in the level of taxation and the spending of the government can affect the macroeconomic variables like income distribution, saving and investment and aggregate demand (Fagiolo & Roventini, 2016). In case of recession, expansionary fiscal policies are needed to be used. One problem with the Fiscal policy id the crowding out effect where there is increase in G which may increase output but at the expense of other components
Y =C+I+G +NX
When G changes, there is already the Fiscal policy. By changing G or the net taxes T, the government can change the equilibrium income Y which is termed as Fiscal policy. Y = a + b (Y-T) + I + G. The net taxes T affects expenditures by affecting the amount of disposable income.
Monetary policies consist of changes in the supply of money, interest rates and the exchange rates. The main measure of the monetary policy is the changes in the rate of interest because the rise in the rate of interest helps in implementing a deflationary monetary policy. Monetary policy will also help in reducing aggregate demand by lowering investment and consumption (Brayton, Laubach & Reifschneider, 2014). As a result, household will also spend less due to the availability of less discretionary income.
The holdings of money are affected by the nominal interest rate, general price level and the level of real income (De la Porte & Heins, 2016). At the point of ie, people will want to hold exactly that amount of money which is available. When there is a fall in the nominal interest rate it will result to rise in the net export since the value of the dollar will fall down. When the value of the dollar falls, the net exports must rise.
Types of macroeconomic policies
Effect of money market in the AD curve- The rise in the stock of nominal money will lead to increase in the stock of real money at the each level of prices. In case of the market of assets when the rate of interest decreases it will make the public hold high real balances. It will stimulate the demand and also increase the income level along with spending. Therefore, in case of monetary expansion the supply curve moves to the rige
When there is an expansionary monetary policy which includes rise in money supply then the nominal rate of interest will fall and both investment and consumption will rise.
The Global Financial crisis can be referred to that period of time where there was an extreme stress in the financial markets along with the banking systems between the years 2007 to 2009. During the GFC, there are huge number of people who have lost their jobs when the economies were in the deepest recessions at the time of Great Depression. . some of the main reasons of GFC comprises of huge amount of risk taking in a macroeconomic environment which was favourable, it also takes place when borrowing have increased both by the banks and also the investors and also due to policy and regulations errors. The manufacturing sectors of Australia were hugely affected by the Global Financial Crisis. However, the impact of GFC on the manufacturing sectors of Australia was much less severe. The effect of GFC was highest in the automobile industry and in all those regions where there was the highest rate of job losses.
The steady economic environment in Australia post the global financial crisis has been a quite difficult task. The changes in the outlook of the economy would affect the self-assurance of the business and consumers. The huge structural current account deficit of Australia will affect both the inadequate national savings and investment returns. One of the main causes is the deficiency in the public savings at the Commonwealth level.
Inflation is that rate at which the price of goods and services rise while the value of investment might not (De la Porte & Heins, 2016). Australia is a part of the global economy and the Reserve Bank is also aware of the levels of trading. However, the low interest rate also stimulates the economic growth. Therefore, business is encouraged to borrow money in order to expand.
Monetary policy
The inflation target of Australia aims to keep the consumer price between two to there per cent on average over time. Inflation targets takes place while guiding the policy of the Central Bank and also ensuring accountability in managing the economy. (Adrian & Liang, 2016). The Reserve Bank of Australia uses the inflation target so that the goals of price stability is achieved which also suggests that stable and low inflation will contribute to the sustainable growth of the economy. When there is presence of high inflation the purchasing power of the consumers will also go down.
The Reserve Bank Board sets the interest rates in order to achieve the stability of the currency in Australia, maintaining full employment in Australia and the economic prosperity and welfare of the Australian people. The main objective of the monetary policy of Australia id to control the rate of inflation. Therefore, the inflation target is the centre piece of the monetary policy framework. Both the Governor and the Treasurer have agreed to the inflation target for the monetary policy in order to achieve the rate of inflation of 2-3 per cent(Sims, 2016, August). The inflation target can be termed as a medium-term average which is to be held at all times. It has been found out that in Australia controlling inflation is quite difficult. The approach to the monetary policy in Australia has been commenced from the 1990s. The policies to reduce inflation consists of monetary policy, Fiscal policy and supply side polices. Inflation is an economic problem which have negative impacts on the economic outcomes which includes economic growth, international competitiveness along with inequality in income. Therefore, maintain low inflation is one of the major objectives of the economic policy. Both the unemployment and inflation are closely related to each other(Gopinath, 2017, October). Therefore, in order to control the inflation the Australian Government’s macroeconomic stance are usually taken place with the usage of monetary policy. The monetary policy of Australia which states influencing the rate of interest are used for managing the monetary supply of Australia. With the influence of the operations, the rate of interest and the cash rate are adjusted to the growth of inflation in the economy. The usage of monetary policy consist of time lag where the impacts are invisible n the short term.. The Reserve Bank impacts the rate of interest of the economy as a pre emptive measure which is based on the forecasts on unemployment, inflation and the economic growth.
Rise in money supply
Fiscal policy however can be termed as another economic tool which have been used by the government of Australia in order to control inflation. As the aggregate demand of Australia is influenced by the expenditure of the government along with the taxation decisions implemented in the budget, therefore in order to achieve external stability, the fiscal policy are used for stabilizing the fluctuations in the economy. (Gopinath, 2017, October). Australian stabilizers are also important in the budgetary framework of Australia which directly affects the revenue along with the level of economic activity. As due to the excess demand and cost push inflation, there is an occurrence of inflation. The Reserve Bank and the government will control inflation so that the sustainable rate of inflation stays at the rate of 2-3%. While adjusting expenditure and level of revenue due to change in taxation which will lead to deficit in budget or surplus. When there is a decrease in the spending of the government and also an increase in taxation will also decrease the demand and minimize the gap of inflation in the employment wages.
In both United Kingdom and United States . The government controls inflation by raising and lowering the rate of interest. In the United States the Federal Reserve controls inflation by controlling the money supply. The Fed usually engages in the open market operations and buying financial assets on the open market. In order to control inflation, the fed controls the money supply by many ways. However, in case of short run the monetary policy effects inflation and also affects the demand for services and goods. The government also manages the activity of the economy so that high level of employment are met with stability in prices. There are presence of three tools which are usually used by Federal Reserve so that the control is maintained over the money supply and credit in the economy. One of the significant tools is the open market operations which comprises of both selling and buying of securities. For increasing the money supply the Federal Reserve will buy securities from banks (Sims, 2016, August). However, when the Fed decides to decrease supply of the money , at that time it decides to sell the government securities to the banks collecting reserves from them. The Federal Reserve also controls the supply of money . Another tool by which the Federal Reserve can control money supply is by the discount rate. The discount rate also consists of that rate by which the commercial banks pay in order to borrow funds from the Reserve Banks. With the help of lowering and raising the discount rates the Fed can both promote and discourage borrowing. It can also alter the amount of revenue available to banks in order to take loans. The above-mentioned tools help the Federal Reserve in expanding and contracting the amount of money in the US economy. When the money supply increases, credit is said to be loose. In such situations there is a tendency for the interest rates to drop and the both the consumer spending and the business spending tend to rise. Therefore, it can be stated that monetary policies are effective in fighting inflation.
The Global Financial Crisis
The Federal Reserves in the Central Bank of America. there are four functions of the Federal Reserve of which one of them is managing inflation along with maintaining stable prices. It sets the inflation target at 2 percent for the core inflation rate. Secondly the Fed also regulates many banks of the nation to protect its customers (Adrian & Liang, 2016). It also maintains the stability of the financial markets and provides banking service to other banks. The economists of Federal Reserves determine number of methods in order to find whether the monetary policy should be made tighter. As the importance of monetary policy increases and the role of fiscal policy reduces , the economy will reflect both economic and political realities. In order to fight inflation, the government had to take actions like raising taxes.
One of the remedy of the monetary policy for the economic decline is to increase the monetary amount along with cutting the interest rate. However, when the interest rates reach to zero it encounters a situation known as the liquidity trap.
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