Macroeconomics Questions and Answers

Question 1: (Word limit 500).

The inflation target of the Reserve Bank of Australia (RBA) is 1~3%. Suppose now the inflation is going up quickly and will be higher than this target soon. Moreover, the strong Australian dollar has started to hurt the Australian export. Please use what you have learnt from this unit to discuss whether it’s possible for the RBA to keep the inflation within the target and also to depreciate the Australian dollar. [10 marks]

Through utilizing inflation targeting, the RBA will usually raise interest rates if inflation appears to be above the target range of 1-3% in hopes of decreasing the inflation rate. The raised interest rates will then decrease the demand for money due to the higher opportunity cost of holding monetary assets.

Price level and the dollar value could be affected by a mixture of monetary and fiscal policy. These factors, more often than not, would shift the dollar and price in opposing directions. Keeping in mind that real exchange rates adjust for the differences in local and foreign price level are constant.

An expansionist monetary policy in which the RBA increases the money (M) supply may cause prices (P) to rise. While an increase in money supply would likely result in the exchange rate of the dollar (E) to fall.

As the dollar depreciates, more than the rise in price, the real change rate (R) declines and the price level increases.

Thus we can conclude that a decline in real exchange rate independently results in a raise in price level.

If the RBA wishes to depreciate the Australian dollar, it may do so through expansionist monetary policy. As the money supply increases and Australian interest rates are lowered (graph) relative to their foreign counterparts. T...

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...the earthquake to the Japanese market. This could be attributed to the economic uncertainty of the affected regions in addition to the production disorder of the affected regions.

Nonetheless, after put into practice expansionary monetary policies, the Japanese government will seek to restore and reorganize the damaged regions. Accordingly, in conjunction to decreased interest rates that would stimulate demand, Australian exports would increase due to increased demand for raw materials The boost in exports to Japan will result in rising Australia’s Gross national Product and Gross Domestic product. Furthermore, the increased exports may result in a surplus of exports over imports, resulting in an increased net foreign wealth. Australia's currency would also appreciate due to increased purchases of Japan's federal bank in regards to Australian dollar based assets.