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Australia has had one of the strongest economies in the world in recent years, more competitive, open and vibrant than ever.

Extracts from this document...

Introduction

Contents 1. Introduction 2 2. Methodology 2 3. Economic Objectives 2 3.1 Economic Growth 2 3.2 Internal Balance 3 3.2.1 Full Employment 3 3.2.2 Price Stability 3 3.3 External Balance 4 3.4 Standard of living 4 4. Economic Indicators 4 4.1 Gross Domestic Product (GDP) 5 4.2 Inflation 6 4.3 Unemployment 7 4.4 Current Account Deficit 8 5 Macroeconomic Policies 9 5.1 Monetary Policy 9 5.1.1 Monetary Policy at work in our economy 9 5.2 Fiscal Policy 10 6.2.1 Fiscal Policy at work in our economy 11 5.3 Effectiveness of Australia's Policy Mix 12 6. Economic Outlook for the future 14 6.1 Coincidental Indicators 14 6.2 Leading Indicators 14 6.2 Indicators relating to government objectives 15 7. Conclusion 15 8. Bibliography 17 1. Introduction Australia has had one of the strongest economies in the world in recent years, more competitive, open and vibrant than ever. Australia's strong economic performance over the past decade has been rooted in strong growth, low interest rates and low inflation. It has also been the result of an aggressive and lively private sector, a skilled, flexible workforce, effective macro-economic management and on going micro-economic reform. This management and reform takes the physical form of government policies known as monetary and fiscal policy, and government initiatives relating to micro-economic reform. (Australia Now, 2003) 2.0 Methodology In researching the Australian economy my main source of information was the internet. Online I found many informative articles and interviews which have proven invaluable in my discussion of the economy. I also utilised books from our school library, classroom notes, textbooks and human sources to further my understanding of the Australian economy. After having compiled all of my research I designed a detailed plan of my analysis and set about writing it. 3.0 Economic Objectives In order for the government and economists to assess the effectiveness of our fiscal and monetary policy, they must consider several factors. ...read more.

Middle

(Alcorn, 2003) 5.1 Monetary Policy Monetary policy aims at influencing the level of interest rates in order to achieve the desired economic objectives of a country. Monetary policy is today effected by the Reserve Bank of Australia (RBA) which is independent of government control. Whilst in theory this may be seen to be true, the bulk of employees sitting on the board of directors are government appointed. (Bulmer, 2003) Australia's monetary policy aims to ensure that inflation remains low and that the swings of the business cycle are kept under control. Ultimately, monetary policy is aimed at ensuring internal balance by stabilising aggregate demand and controlling inflation. (Bulmer, 2003) 5.1.1 Monetary policy at work in our economy In 1993 the RBA adopted a target for monetary policy. This target was to maintain underlying inflation to a rate between 3 and 4 percent, and it is argued the government has done well to realise this objective (Fig. 9). The early 90s saw a high inflation rate, predominantly as a result of the 90/91 recession. CPI remained fairly constant, around the 2.5% mark until the mid 90s. Fears of an accelerated inflation figures in the period between 1994 and 1996 prompted the Reserve Bank to raise interest rates (See Fig. 8). The cash rate stood at 7.5% at the end of 1994. Until 1996, it stayed at this level - the RBA then declared the inflation had fallen enough, and with the slowing down of the Australian economy in 1996, the RBA cut the cash rate back to 6% in an attempt to encourage economic growth. In 1997, the RBA cut back the cash rate a further 1% to 5%, where it remained until late 1998. This was a move to try to increase growth further than previous expansionary moves in 1996 had allowed, however it did not have the effect the RBA were looking for. ...read more.

Conclusion

Unfortunately, Australia's CAD will only increase in 2004, as a result of a drop in exports and an expected rise of 10% in imports (Allan, 2003). This will obviously create a budget deficit which will lead to greater foreign debt. As a result of this, fiscal policy is likely to adopt contractionary policy. Monetary policy should remain fairly constant for the moment. As the economy reaches its peak and begins to decrease, however, the RBA will adopt an expansionary stance in relation to monetary policy, and will lower interest rates. In relation to the final government objective, therefore, CPI will decrease initially as a result of a break in the drought and the return of agricultural goods to lower prices. In the longer run, however, as the RBA ease monetary policy, CPI will rise once more. (NOIE, 2003/Anderson, 2003) 7. Conclusion As has already been discussed, the Australian economy has experienced a sustained period of recovery over the last ten years. This recovery period is nearing its end, suggesting that the economy is nearing a boom period. The indicators of GDP, CPI, Unemployment and CAD have been discussed and with exception of the latter, have all been found to be strengths of the economy. Arguably, with careful fiscal policy management in the future, CAD can also become a strength for Australia. In terms of monetary and fiscal policy, the RBA and government respectively are doing an excellent job of managing our economy, with the exception of foreign debt, which fiscal policy needs to target in the future. The future seems to be bright for Australia, with growth expected in spite of the recent drought. This can be attributed to a lively and productive housing and construction sector, which form a solid foundation on which our economies growth is built. Unemployment is also set to improve as is the price stability of our economy. As previously mentioned, however, CAD is still an area of concern. Ultimately, however, the Australian economy is headed in the right direction and should remain a world-competitor for years to come. 8. ...read more.

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