Econ 11026 Assessment Item 3- Take Home Paper- Case Study

Objectives This assessment item relates to course learning outcomes 1 and 4 as listed in the unit profile. Task description: In this task, you will build a case study based on the article: RBA decision December 2017, provided on page 3 of this task sheet (along with the link). Guiding questions,found on page 4 of this task sheet will help you structure your response when building the case. Do not forget to apply the DADA framework, using data and graphs to support your response. A marking rubric is posted on the Moodle site, which can help you understand what is required to reach your desired level of achievement.Note: You will have to do research for this assignment to find some secondary data, tables and graphs from the ABS and RBA websites related to GDP, unemployment, inflation, exchange rates, interest rates and their impact on consumption demand, commodity prices, business investment and the housing market. You will need to include this research in your case study. Suggested way to approach the task 1. Get a good understanding of macroeconomic objectives, unemployment, inflation,the role of money, monetary policy, interest rates, the Reserve Bank of Australia (RBA), and economic growth from course resources. Refer to relevant chapters from the set textbook and other economics textbooks for theory. You also need to refer to other on-line articles and news items related to the case study. Draw on the work you have done at home or during workshop session solving the weekly textbook-boxed case studies as these will help you learn to think like an economist. 2. Read and take notes about the article RBA decision 5-Dec-2017 on page 3 of this task sheet. 3. Look at the guiding questions on page 4 of this task sheet. These will help you apply the theory to a real life monetary policy example of economics at work. 4. Conduct research (find related articles and search the RBA website) relevant to the current situation in the Australian economy and the RBA’s role, function and conduct of monetary policy to keep inflation within the target rate. Find tables and graphs that show the current levels of inflation, interest rates, and money supply and the relationship between inflation, investment, GDP and interest rate, and use these to draw conclusions and justify your answers. 5. Read the How to write essays in economics guide available in the Assessment section of the Moodle site as this will help you adopt the appropriate writing style for your case study. Your assignment should have an introduction paragraph regarding the case and respond to the five (5) questions located on page 4 of this task sheet within 5 body paragraphs. Be sure to connect the paragraphs with tables and graphs and have a final concluding paragraph. 6. Be sure you fully respond to each of the guiding questions, which are provided to give you direction when writing and building the case study. 7. Drawing on your research and notes about RBA decision 5-Dec-2017, apply the DADA framework while answering each of the questions (Definitions: define the key terms; Assumptions: list or make assumptions as required; Diagrams: draw relevant graphs/tables and explain; and original Analysis: apply the theory to real life economic examples and explain to justify your answer). Remember: a. Concepts and key terms must be defined accurately and completely b. The assumptions upon which the analysis is based must be stated at the outset. c. Diagrams must be drawn properly and correctly labelled, explaining the relationships they depict. d. Analysis overall should be provided by relating economic theory to how interest rate decisions are made and their impact on real-life economics. 8. Review your draft case study against the marking rubric (located in the assessment section of the Moodle site) to be sure; you have addressed all key criteria. Make sure you have focused on the key macroeconomic objectives and applied macroeconomic concepts and theory to the role of money, banking, inflation, interest rates and the functions of the Reserve Bank of Australia. 9. Sources must be acknowledged using APA referencing style. Make sure you include in-text references to acknowledge others’ work and provide a reference list. 10. Plagiarism is an issue. Do not show your assignment to your classmates. Important Background Reading RBA Monetary Policy Background Information http://www.rba.gov.au/ The RBA board meets 11 times a year (not in January) at the RBA in Martin Place, Sydney. Prior to the meeting, board members are provided with analysis of the economy and the financial markets by the RBA staff (prepared by the Economic Analysis Department). Among these analyses are the bank’s forecasts of future inflation, as well as the likely future path of economic growth overseas and domestically. RBA monetary policy decisions are based on these analyses as well as a range of other macroeconomic assumptions. In addition, scenarios are provided as to the likely macroeconomic outcomes if monetary policy was adjusted. The RBA meeting occurs on the first Tuesday of each month. After much discussion, a consensus decision is reached as to whether to leave interest rate unchanged or to adjust these rates. The instrument that RBA uses is the cash rate and, if an adjustment is decided, it will be to adjust the cash rate by 0.25 per cent, 0.50 per cent or 1 per cent. The most common adjustments are 0.25 per cent and 0.50 per cent. Since the last decade, the adjustment has been at 0.25 percent. With the unfolding of GFC, the RBA monetary policy response has been to cut the cash rate six times since September 2008 and cuts have been as large as one per cent. These cuts were designed to help Australia avoid the synchronised international recession, which hit all of the major economies in the 2008-2010 period. Once the decision is made, the RBA Governor announces its decision and, if a rate adjustment is made, banks will potentially make changes to their interest rates the following day. RBA also publishes the minutes of its Board meetings two weeks after each meeting and provides quarterly statement on the Monetary Policy. The RBA does not set this interest rate (as the commercial bank sets its mortgage rate), but it continuously influences the rate through its daily financial operations in the money markets. If the RBA buys Treasury notes, the supply of excess reserves in the banking system increases and the cash rate falls. If the RBA sells Treasury notes, the supply of excess reserves in the banking system decreases and the cash rate increases. Because of these changes in the cash rate, interest rates in general are influenced. In May 2015, RBA cut the official interest rate to 2.0 percent, which remained unchanged for a year. In May 2016, RBA governor announced a cut in cash rate by 0.25 basis point, to 1.75 percent, which remained unchanged until August 2016. The official cash rate since August 2016 has been at the historical low of 1.50 percent. Focus reading for your case study Media Release Statement by Philip Lowe, Governor: Monetary Policy Decision https://www.rba.gov.au/media-releases/2017/mr-17-25.html Date 5-12-2017 At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over 2017. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy continues to be supported by increased spending on infrastructure and property construction, although financial conditions have tightened somewhat as the authorities address the medium-term risks from high debt levels. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels. Wage growth remains low in most countries, as does core inflation. In a number of economies there has been some withdrawal of monetary stimulus, although financial conditions remain quite expansionary. Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low. Long-term bond yields remain low, notwithstanding the improvement in the global economy. Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forwardlooking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high. Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. There are reports that some employers are finding it more difficult to hire workers with the necessary skills. However, wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time. Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens. The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast. Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Nationwide measures of housing prices are little changed over the past six months, with conditions having eased in Sydney. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time. Suggested structure and guiding questions for your case study Introduction: Provide an introduction about the case. Question 1: Explain the main objectives of monetary policy. List and describe the main functions of money and the Reserve Bank of Australia. Question 2: Why does the RBA take into account the global macroeconomic indicators ofmajor economics like China, Japan, India, and USA, including the domesticmacroeconomic indicators (GDP, inflation, unemployment, and exchange rate) when making a decision whether to change (increase or decrease) or keep the official cash rate unchanged? Explain. Question 3: On 5-12-2017, the Governor of the RBA, Dr Philip Lowe, decided to leave the official cash rate unchanged at 1.50 percent. Why did the RBA keep the cash rate unchanged? Justify your answer with reasons and evidence. Question 4: Illustrate and explain using the money market equilibrium model and monetary transmission mechanism how an increase in the cash rate from 1.5% to 2% would helpto keep inflation within the target rate and how a further decrease from 1.5% to 1 % in the cash rate would help to stimulate the economy. In particular, discuss the effect on household consumption, business investment, government spending, GDP, inflation and housing market. Describe the circumstances in which the Board might increase and decrease the cash rate. Note: Use GDP, inflation, unemployment, fiscal deficit, and housing market data can be obtained from the Australian Bureau of Statistics and RBA websites for the last 5 years to see the trends, when answering this question. Question 5: Define economic growth. What are the determinants of long-run economic growth? Is the historically low interest rate of 1.50 percent (from August 2016 until the present) sustainable to achieve long-run economic growth? Yes/No, justify your answer with reasons. Note: Students need to give their own views supported and justified by several references and examples. Conclusion: Provide an overarching conclusion to the case. Reference list: Use in text citations within your paper to refer to these references.