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Impact of Macroeconomic Policies

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Published: Tue, 07 Aug 2018

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The expansionary monetary policy decisions of the Reserve Bank of Australia (RBA) during the six months after the global financial crisis (GFC) escalated in September 2008.

1. Executive Summary

2. Monetary Policy of Australia after GFC

2.1 Arguments in Support of policy Decision

2.2 Arguments against the policy decision

3. Conclusion

References

The expansionary monetary policy decisions of the Reserve Bank of Australia (RBA) during the six months after the global financial crisis (GFC) escalated in September 2008.

1. Executive Summary

The assignment is based on the Global Financial Crisis 2008 and its impact on the Australian economy. The assignment covers the main reason behind the GFC and the response of Australia’s reserve bank regarding the expansionary monetary policy to fight the Global financial Crisis. Later assignment also has the arguments in support and against the policy decision. Later it is concluded by following the evaluation outcomes.

2. Monetary Policy of Australia after GFC

The global Financial Crisis of 2008 was considered as the worst financial crisis since year 1930 by several economists. It leads to the total collapse of many large financial institutions, the rescue of many banks by the government and major downfall of the world’s stock market (Williams, 2012). Due to the crash of the global share market, the Australian Dollar also collapsed. The net wealth of Australia was declined and the unemployment was increased considerably. There was a wave of uncertainty that swept the entire economy of Australia. . As per the data, the average of the household debt was increased from increased from $A190 billion in 1990 to $A1.1 trillion in year 2008 (ABS, 2009). The direct impact of the Global crisis 2008, in Australia was:

  • The decline of Australian Dollar from 0.98 to 0.60
  • The decline in the summative value of the households between 13 to 14 %
  • The significant decline in the household consumption
  • The increase in saving of household from 1.2 % to 8.5 %
  • Increase in rate of unemployment from 4.1% to 5.8 %

The Australian government was very prompt to take the action against the situation in order to reduce the impact of the Global Financial crisis 2008. The reserve bank of Australia decided to loosen the monetary policy for one year with the aim of rectifying the loss of big business and consumers that occurred due to Global Financial Crisis. Under this policy the RBI made the considerable reduction in the interest rates and increased the money supply in market. This led to overall consumption in the market of Australia (Green et al., 2009). The cash rate as also reduced by the reserve Bank and it lead to overall 4 % drop within the months of policy formulation.

The monetary policy had the following effects on the Australian economy:

  • It showed the positive result in dealing with Global Financial Crisis and prevented the Australian economy from recession & lead to an apparent recovery
  • The investment and consumption levels were increased and the unemployment rate was decreased that showed the favorable national output and aggregate demand (Gregory, 2008)
  • The impact of the expansionary monetary policy and the fiscal led to a positive impact in relation to the level of Gross Domestic Product growth rate of 0.9% in December 2009 quarter from -0.8% in December 2008 (Rotheli, 2010)
  • As per the treasury reports of Australia, without implementation of the expansion monetary policy the gross domestic product of the economy would have been accounted to 0.7 percent (ABS, 2013).

2.1 Arguments in Support of policy Decision

The monetary policy regulated by reserve bank of Australia played a significant role in fighting with global financial crisis. The monetary policy helped the Australian economy to fight the severe inflation conditions. In the beginning of the global financial crisis, the conservative monetary policy was formulated and implemented in response to the substantial decrease in the aggregate demand and the declining of the global financial market circumstances. The Australian government took the conventional monetary action with determination and speed.

The target national funds rate was slash rapidly from five hundred and twenty-five points in September 2007 to zero till twenty five points in December 2008 (ATO, 2009). The other countries also followed this path by decreasing the interest rates on an average by 330 points in the developed countries and 300 points in developing economies. In the current situation Australia is one of the major four developed economies with official interest rates above 1 % (ABS, 2010).

According to the world standards, Australia responded reasonably to the Global Financial Crises through a good combination of government stimulus, responsive policies of reserve bank, resources boom and prudential standards that were pre-existing.

2.2 Arguments against the policy decision

There are many weak points in the monetary policy by the Reserve bank of Australia. There were many discrepancies that were exposed later. The arguments against the policy decision include the following points:

  • There was no uniformity in the prices of Australian stock market and this anchored the inflation expectations.
  • The implementation timing of the monetary strategies will be dependent on recovery pace and the return of normal conditions of the financial markets (Lunn, 2008).
  • The policy raised the concerns about the fiscal stability in international market
  • The policy was not able to deal with the major problem of unemployment in Australia. The unemployment figures of Australia during the Global Financial crisis were at 6.5 percent as compared with the United Sates was over 10 percent. In the current situation, the current unemployment rate in Australia is 5.3%. Consequently they have improved and recovered from the crisis but did not move in the required rate (Eslake, 2009).

3. Conclusion

For determining the Australia’s economic condition there are many factors that must be considered. This report focused on the major factors of the policies implemented by the Australian government to reduce the impact of Global Financial Crisis. The Australian government was very prompt in taking the action against the losses of Global financial crisis. It is noted that the policies and procedures of the Australian government helped them to recover fast and they are much ahead of other developed nations. Australia responded reasonably to the Global Financial Crises through a good combination of government stimulus, responsive reserve bank, resources boom and prudential standards that were pre-existing. Even though the current situation of Australia has not reached the level of pre GFC situation, but still it regained mush better than the other developed nations like United States of America.

References

  1. ABS (Australian Bureau of Statistics) (2009)Australian Social Trends4102.0. Available at: www.abs.gov.auaccessed 18/4/10.
  2. ABS (Australian Bureau of Statistics) (2010)Labour Force, Australia6202.0 Available at: www.abs.gov.auaccessed 18/4/10.
  3. ATO (Australian Tax Office) (2009)Commissioner of Taxation Annual Report 2008-09 Available atwww.ato.gov.auaccessed on 11/02/09
  4. ABS (Australian Bureau of Statistics) (2013)Labour Force, Australia6202.0
  5. Bloxham, P. and Kent, C. (2009) ‘Household Indebtedness’The Australian Economic Review, Vol 42(3): 327-39.
  6. Debelle, G (2008) ‘A comparison of the US and Australian housing markets’BulletinJune 2008 RBA Available at:www.rba.gov.au/publicationsAccessed 18/4/10
  7. Eslake, S. (2009) ‘The global financial crisis of 2007-2009: An Australian perspective’ Economic PapersVol. 28(3): 226-238
  8. Green, H. Harper, I and Smirl, L. (2009) ‘Financial Deregulation and household debt: the Australian experience’The Australian Economic ReviewVol. 42(3)
  9. Gregory, R. G. and P. Sheehan (2008), ‘Poverty and the collapse of full employment’, in R. Fincher and J. Niewenhuysen, (eds.), Australian Poverty: Then and Now, Melbourne University Press, Melbourne, 103-26
  10. Lunn, Stephen (2008).“Life gap figures not black and white”.The Australian(News Limited). Retrieved 7 December 2010.
  11. Paletta, Damian; Lucchetti, Aaron (2010). “Senate Passes Sweeping Finance Overhaul”. Wall Street Journal. Retrieved July 22, 2010.
  12. Rotheli, T. (2010) ‘Causes of the financial crisis: Risk misperception, policy mistakes, and banks’ bounded rationality’The Journal of Socio-Economic39(2010): 119-126
  13. Valentine, T. (2009) ‘Alternative Policy responses to the global financial crisis’EconomicPapersVol. 28(3): 264-269.
  14. Williams, Carol J. (2012).“Euro crisis imperils recovering global economy, OECD warns”. Los Angeles Times. Retrieved May 23, 2012.
  15. Williams, R. (2009) ‘Household debt: Is it a liability?’The Australian Economic ReviewVol.42(3): 321-32

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