Economics Essay

The use of monetary and fiscal policy by the Australian government is a tool in achieving its main economic objectives. These include sustained economic growth, price stability, external stability, equal income distribution and full employment (at the natural rate which excludes cyclical unemployment). Monetary policy is a macroeconomic tool which involves the Reserve Bank of Australia selling and buying Commonwealth securities in the short term money market. This is known as Domestic Market operations which aims to influence the cash rate which is the rate charged on overnight loans and therefore the general level of interest rates. Fiscal policy is another macroeconomic policy which involves the government reducing or increasing spending, taxation and the overall budget outcome to influence resource allocation, redistribute income and minimize the functions of the business cycle. An overview of the history of monetary and fiscal policy in past decade reveals that it has achieved some of its objective such as an average inflation rate of 2-3 p.a %, sustainable economic growth at 3-4% p.a and a stable Gini coefficient of 0.304-0.32 at some periods while at the same time not achieving other objectives e.g. external stability.

Economic growth is the increase in real GDP over a period of time usually one year. Although economic growth is beneficial it must be kept at a sustainable level of 3-4% to avoid a CAD blowout or high inflation. Therefore the RBA through its use of DMO will buy government securities and force the cash rate down, this reduces interest rates and increases economic activity and vice versa. The RBA’s focus in the last decade has been accelerate growth, therefore the interest rate have been relatively stable with movements roughly within the 4-7% band. With the onset of the global financial crises, the RBA has reduced the cash rate over the past few months from over 7% down to the current 3.0%. In regards to fiscal policy, monetary policy is more...