MCR001 Economics Case Study Sample
Instructions
Use the attached Statement on Monetary Policy February 2024 Overview by the Reserve Bank of Australia for economic growth in Australia to write a brief on the current macroeconomic situation in Australia.
• Firstly, your brief should assess the key Macroeconomic Variables and the relevant factors that influence them.
• Secondly, you should apply the key Macroeconomic Variables to the AD/AS Model to determine which phase the Australian economy is in.
• Conclude your brief by commenting on the key Macroeconomic Indicators and what these imply for the current state of the Australian macroeconomy.
Your brief should be no more than 1,200 words, excluding references, and should be structured as follows:
1. Overview
2. The Key Macroeconomic Variables
3. The ‘AD/AS Model’ (including diagram/s)
4. The Key Macroeconomic Indicators
5. Conclusion
6. References
Case study - Statement on Monetary Policy – February 2024
Overview
Inflation continues to moderate but remains high.
Inflation continues to moderate and is expected to return to the target range of 2– 3 per cent in 2025 and to reach the midpoint in 2026. Goods price inflation has declined but services price inflation remains high, supported by continued excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs.
Higher interest rates are working to establish a more sustainable balance between demand in the economy and its overall capacity to supply goods and services. The staff’s assessment is that the stance of monetary policy in Australia is currently restrictive, based on financial indicators and the ongoing easing in the growth of aggregate demand. Conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target. A period of subdued demand growth and moderate employment growth over the coming year or two will bring about a better balance between supply and demand.
Cash rate target unchanged to support inflation returning to target.
High inflation hurts all Australians. It erodes purchasing power and the value of savings and makes it harder for businesses to plan and invest. It adversely affects all Australians, but particularly those on low incomes. Low and stable inflation, consistent with the inflation target, facilitates strong and sustainable growth in the economy over the longer term. The best contribution that monetary policy can make to the wellbeing of the Australian people is to ensure that inflation returns to target in a reasonable timeframe.
At its February 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.35 per cent. This decision supports progress of inflation to the midpoint of the 2–3 per cent target range within a reasonable timeframe and continued moderate growth in employment. The Board expects that it will be some time yet before inflation is sustainably in the target range, and the Board remains resolute to return inflation to target in a reasonable timeframe. The path of interest rates that will best ensure this will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.
What is going on in the economy?
Global inflation remains high but there has been encouraging progress towards central banks’ targets. Much of the easing in inflation to date in advanced economies has been due to lower energy and goods price inflation. Services price inflation remains elevated, partly reflecting still tight labour markets. Economic growth has slowed to below trend in many advanced economies in response to restrictive monetary policy settings and is contributing to returning inflation to target. In the United States, economic growth has remained robust while inflation has continued to decline.
Monetary policy settings in advanced economies are restrictive, but broader measures of financial market conditions have eased over recent months. Amid better-than-expected global inflation data, market participants expect central banks to start easing their policy rates over coming quarters. Government bond yields have fallen and spreads on riskier asset classes have declined. Many central banks expect inflation to gradually return to target on a sustained basis over the next year or two. However, they have indicated that rate cuts may not come as soon as market participants expect as they await more evidence that the moderation in inflation will be sustained. Overall, the Australian dollar has been little changed.
In Australia, growth in demand has slowed noticeably.
A large share of the increase in the cash rate since May 2022 has been passed on to borrowers. The most recent cash rate increase in November 2023 has been passed through to advertised rates, and most remaining low fixed-rate loans will roll off onto higher rates over 2024. The share of household incomes used to meet mortgage payments is high by recent historical standards and still rising. Housing credit growth has stabilised at a lower level than in 2022, although new lending has risen over the past year.
Tighter monetary policy has contributed to a noticeable slowing in the growth of demand over the past year. Household spending growth has been weak, and in per capita terms spending has declined. This has been only partly offset by strong growth in business investment, public sector spending and spending by international students and tourists.
High inflation as well as higher interest rates and tax payments have weighed on household disposable incomes. In aggregate, households have responded to these pressures by curbing their spending, particularly on discretionary items. Households are saving less and, in some cases, drawing down on their accumulated savings buffers. Timely indicators, including from the RBA’s liaison program, suggest that growth in consumer spending has remained subdued this year so far.
Solution
Introduction
In its February 2024 statement, the Reserve Bank of Australia (RBA) acknowledged the decline in inflation. The decline, while continuing, is below that of the targeted 2-3% ceiling. The RBA is expecting inflation to be at this target by 2025 and they did note that service inflation is being tough to deal with as businesses face continued high demand and costs. Consistently specified that the cash rate would be left at 4.35% to assist in readjusting the inflation back to its target while achieving the level of employment growth desired (Reserve Bank of Australia, 2024). The statement also includes the impact of global economic activity and local demand changes, underscoring the RBA’s strength in tracking economic growth estimates and labor market conditions Its primary message reflects the RBA’s commitment to carefully reviewing and adjusting interest rates when needed, as it reacts to economic data and other potential risks (Kamber and Wong, 2020).
Discussion and analysis
Macroeconomic Variables
AD/AS model is described to the end in the RBA's Statement on Monetary Policy to study key macroeconomic factors such as Consumption (C), Government Spending (G), Investment (I), Exports (X), and Imports (M). Besides, the given components form collective decisions that affect nominal and real GDP growth rates, while unemployment and inflation rates are involved in the process for university assignment help.
- Consumption (C): Inflation which is combined with interest rate hikes has pressed down on disposable income, to the extent that people started to use up savings and adopt more spending habits. The impetus is both short and long-term and affects demand through a GDP growth model (Kamber and Wong, 2020).
- Investment (I): Their confidence levels have been progressively cemented by investment activities whose impacts are positive to GDP. On the one hand, higher interest rates bring difficulties because the increased borrowing prices may negatively affect investments which may slow down the economic expansion (Bernanke, 2020).
- Government Spending (G): The government plan is still very active; it helps the generation of total demand. Alternatively, the possibility of budgetary cuts can be redirected to the growth nonetheless and the rates of unemployment, especially if public employment is reduced.
- Exports (X) and Imports (M): The trade balance, which is defined by the X / M (Exports / Imports) ratio, is an effective instrument for measuring the economic baseline in a given country. The slowdown in global growth must be accompanied by a drop in the demand for Australian exports, which of course adversely affects the economy. Also, during the same period, the increased currency exchange rate volatility may impact the cost and volume of imports, according to the patterns of domestic consumption (Kamber and Wong, 2020).
The RBA's monetary policy, the cash rate based, tries to achieve the balance between sustainable growth and inflation rates below 2.5%, which are optimum to eliminate unused economic resources (Reserve Bank of Australia, 2024). This strategy considers the complex exchanges between consumption, investment, government spending, and trading as the fundamental factors of Australia's economic well-being.
The ‘AD/AS Model’ of the Australian Economy
Analyzing core macroeconomic variables discloses the Australian status of the economy per the RBA's February 2024 Monetary Policy Statement.
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Figure 1 AD/AS model on Reserve Bank of Australia
(Source: Author, 2024)
The Australian Economy, according to the RBA’s February 2024 Statement on Monetary Policy, currently exists in a phase that is technically between an expansion and an early contraction. That is the time of steady inflation that reality witnesses, yet on average aspirants exceed the offer levels typical for an economy at a point of peak. The RBA's policy to keep the cash rate at 4.35% is meant to subdue the aggregate demand (AD). Consequently, the factor that may provoke economic recession is being eliminated (Australian Bureau of Statistics, 2023).
Consumer consumption which is one of the strongest AD currently expanding elements, has been decelerating down due to the growth of inflation and interest rates affecting people's disposable income. Whereas investment is increasing, however, it might be susceptible to borrowing costs increase. Through federal expenditure, aggregate demand grows but might not always lead to a long-term regime.
A relative slowdown of the world economy and moderating demand at home will weaken the ability of net exports to add to AD in the short term. Projections of a shrinking pace of GDP growth and a jobless rate slightly picking for the near run are indicative of the upcoming recessionary period (Bernanke, 2020).
Metrics such as the declining unemployment rate, wage growth rate, and decelerating job creation figures hint that the economy is experiencing a downward fueled by the hot state. The RBA's tight monetary policy is designed to curb inflation and thus ease the economy into a softer landing rather than it sees a paralytic recession. This tactic represents a conservative way attitude to tackling economic problems with no compromise.
Macroeconomic Indicators
Inflation Dynamics
In December 2023, Australia's inflation by CPI was 4.1%, and by trimmed mean it was 4.2%, both increasing above the RBA's target of 2-3%. These figures expressed inflationary pressures still being in existence, but they are expected to decline gradually, with those projections saying 2.6% by 2026. The current expected easing of monetary policy goes in line with the RBA's guidelines that the price growth is only moderate in the medium run (Bernanke, 2020).
Unemployment Trends
The unemployment rate was at 3.8% in December 2023, which will go up by 0.5% to reach 4.4% by June 2026 (Australian Bureau of Statistics, 2023). This trend will be reflected in RBA's strategy because it aims to strike a balance between minimizing inflation and retaining employment, which shakes up a conservative stance to preserve production capacities that would support economic growth.
GDP Growth Trajectory
The Australian economic growth has been sluggish with the real GDP projected to grow at 1.5% by June 2023 and possibly 2.4% by mid-2026 (Australian Bureau of Statistics, 2023). This indicates a gradually accelerating economic growth that is carefully underpinned by strong monetary policy to ensure a controlled inflation rate and long-term stability.
Overall Economic Condition
The economy of Australia is just avoiding the collapse and seeking for calm adjustment. The RBA's monetary policy adjustments among other things, target modified supply and demand dynamics to ensure a steady economy that doesn't experience sudden declines. The cautious management by the central bank of inflation, GDP growth, and unemployment level as key indicators illustrates the central bank's staunch commitment to realizing balanced and sustainable economic growth (Bernanke, 2020).
Conclusion
Australia's economy is maneuvered through a transition period, in which the RBA is aiming at ending the inflation without causing a drastic decline in its economic growth. Markets labor made progress in recovery but demand remains low. Although progress revealed gradually, the signs now indicate they are leading to an economic balance. The difficulties of the aftermath of the pandemic recovery and the uncertainties of the outside world are presented in the very fluctuations of inflation levels and the GDP value. This fragile balance requires ceaseless policy regulation to make targets of inflation be met and supported sustain growth with no inflation; it shows that it is complicated to make a stable economy roll.
References
Australian Bureau of Statistics. (2023). Key economic indicators | Australian Bureau of Statistics. Author.absweb.aws.abs.gov.au; Australian Bureau of Statistics. https://www.abs.gov.au/statistics/economy/key-indicators
Bernanke, B.S. (2020). The New Tools of Monetary Policy. American Economic Review, 110(4), pp.943–983. doi:https://doi.org/10.1257/aer.110.4.943.
Kamber, G. and Wong, B. (2020). Global factors and trend inflation. Journal of International Economics, 122, p.103265. doi:https://doi.org/10.1016/j.jinteco.2019.103265.
Reserve Bank of Australia. (2024). Key Economic Indicators Snapshot. Reserve Bank of Australia. https://www.rba.gov.au/snapshots/economy-indicators-snapshot/
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