• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The reason the Reserve Bank Of Australia (RBA) reduced the cash rate by 25 basis points from 5% to 4

Extracts from this document...

Introduction

Duff beer MACROECONOMICS 102 ESSAY The reason the Reserve Bank Of Australia (RBA) reduced the cash rate by 25 basis points from 5% to 4.75% is because of concerns over the extent of the economic downturn in the global economy and the likely flow on effects it will have on Australia. I will answer this question in two parts, firstly considering what the RBA feared would happen if the cash rate wasn't cut and secondly considering the effects on the Australian economy of an interest rate cut. The forecasted longer than expected global downturn in major economies like the US, Japan and European Union, has the RBA expecting similar flow on affects in Australia unless expansionary monetary policy is implemented. The RBA was worried that aggregate demand would fall to levels that may risk a recession or a prolonged slowdown in Australia. ...read more.

Middle

[AFR 6/9/01] A reduction in interest rates will increase aggregate demand and boost economic growth through the following ways: A reduction in interest rates (i/r) will reduce the cost of borrowing for business investment, makes business ventures appear more profitable, increases investment=>AD & AE. Also lower i/r's signals price stability and less chance of inflationary pressures being a concern in the economy, which also increases the likelihood of investment being undertaken by businesses. A reduction in i/r's will reduce mortgage repayment loans, therefore increasing the consumer's level of disposable income=> increasing C=> increasing AD & AE. A decrease in i/r's will cause foreign investment funds to be withdrawn from Australia (capital outflow) which results in a decrease in the demand for the Australian dollar ($A), therefore depreciation of $A. ...read more.

Conclusion

With the attraction of lower mortgages predicted to push up asset prices, as the demand for houses increases due to lower i/r's, inflationary expectations still remain low. In the area of Fiscal Policy, the introduction of the GST has created additional tax revenue for the government intent on achieving Fiscal consolidation, which reduces demand-pull inflationary pressures in the economy. The RBA feels it will be able to maintain low inflation also due to downward pressures from a weakening export sector and global economy. The depreciation of the Australia dollar due to the rate cut will naturally cause imported inflation but that will be more than off-set by a slowdown in expected export growth. The RBA is focused on reducing the expected size of fluctuations in output, rather than focus solely on inflation. All these signs point the RBA to cut the cash rate by 25 basis points to 4.75%. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. The Nature of Macroeconomics

    * Households decide to increase autonomous saving --> aggregate income output and employment fall, economy contracts * Paradox of thrift = virtuous for an individual to save but if all consumers increase savings = fall in consumption unless off-set by a rise in investment The accelerator * Induced investment =

  2. Retailing In India - A Government Policy Perspective

    Market seeking FDI to overcome policy barriers - or tariff-jumping FDI refers to cases where import barriers limit foreign companies' capacity to supply local demand through imports, and as a result they end up investing in plants for domestic production only.

  1. What is macroeconomics?

    * Interest rates effect consumption = repayments on borrowed funds increase and opportunity cost of expenditure on consumer items increases (spend or save) * Fiscal policy = affects disposable income through taxes and level of government spending on goods & services * Monetary policy = affects interest rates --> cost

  2. Taxation Reform in Australia

    This reform reduced tax avoidance and acquired a more equitable distribution of income. In addition, the reform was advantageous to the government as it provided more revenue. Nevertheless, another disadvantage is the complexity of the taxation system in Australia. Although the reform discouraged tax avoidance, it generated more legislation thus complicating the tax system.

  1. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    Kalimipalli et al. (2002) considered the relationship between liquidity and volatility in the corporate bond market. They found that in general, higher volatility in the returns on assets has two implications for investors: firstly, that they face a higher inventory risk on account of imbalances in their portfolios due to

  2. National Westminster Bank

    Once these issues are identified it will then be possible to identify any potential consequences which NatWest is likely to face if they are not addressed, the use of relevant analytical tools will make this possible. The report will then suggest and analyse alternative solutions to potential problems by weighing up the advantages and disadvantages of any proposed solutions.

  1. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    and the choice of weights: where is the variance of the portfolio, and are the variances of the individual assets, is the correlation between asset 1 and asset 2, and the w's are the weights of the individual assets in the portfolio.

  2. Exchange rate.

    And the currency is not allowed to appreciate or depreciate against each other. It is guaranteed and totally controlled by the government. In order to keep a currency at a fixed value, the central bank must prepare to buy and sell the currency at the fixed price.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work