Economics Questions Thread

[chrisjb]

I thought Higher AUD (Exclude TOT) leads to reduced international competitive as our final goods and services become more expensive?


Eg Tourism Education

Yes, it does. Except I'm saying that there are two effects of a high TOT:

1) High AUD worsens international competitiveness

2) High export prices increases value of credits in net goods and services, improving international competitiveness.

I think that in most economies (and this is just a guess) there would be a 'J' curve effect with a high TOT, in the short term we would see the second good effect improve international competitiveness, however in the long run the high dollar would worsen export competitiveness.

However, because so much of Australia's exports are demand inelastic (commodities to china), the TOT causing a high dollar is less influential than the skyrocketing export prices we are receiving which result in an improvement in net merch.

In the exam, I reckon you could take either view as long as you recognised both sides of the argument.

[Saur11]

Also it is worth noting that a high AUD can reduce upward pressure on the structural CAD, by paying off NFD (provided that debt is is in AUD), there should be decreased interest in the net incomes in the CAD. Logically, this should help with external stability.

[chrisjb]

Also it is worth noting that a high AUD can reduce upward pressure on the structural CAD, by paying off NFD (provided that debt is is in AUD), there should be decreased interest in the net incomes in the CAD. Logically, this should help with external stability.

oh yeah, I'd forgotten about that point!

[Hutchoo]

Also it is worth noting that a high AUD can reduce upward pressure on the structural CAD, by paying off NFD (provided that debt is is in AUD), there should be decreased interest in the net incomes in the CAD. Logically, this should help with external stability.

oh yeah, I'd forgotten about that point!

Try to mention the net incomes component of the CAD, seeing as it's the most important/biggest cause of the deficit when answering questions about ES.

[chrisjb]

A question about monetary policy questions:

If asked on monetary policy effects on external stability, should we talk about the potential for the RBA to manipulate the exchange rate if it's fluctuating too much? Or should we just stick to the good ol' cash rate effects?

[Hutchoo]

A question about monetary policy questions:

If asked on monetary policy effects on external stability, should we talk about the potential for the RBA to manipulate the exchange rate if it's fluctuating too much? Or should we just stick to the good ol' cash rate effects?

Yeah, it'd be okay, but if you're talking about the dirty float, it's kinda 'meh'. The last time the RBA manipulated the AUD by a dirty float was like 20 years ago.

I'd actually talk about how the changes in the cash rate alter the transmission mechanism (focusing on the exchange rate channel), thus changing the AUD (depreciation if IR is low/Appreciation if the IR is high).

[Hutchoo]

How can monetary policy be used to achieve equity in income distribution?
I know that lowering of the interest rates allows the lower quintiles to have more purchasing power, and those in the upper quintiles make less due to interest repayments declining, but what else is there?
Thanks

[Water]

How can monetary policy be used to achieve equity in income distribution?
I know that lowering of the interest rates allows the lower quintiles to have more purchasing power, and those in the upper quintiles make less due to interest repayments declining, but what else is there?
Thanks

Lol, good exam practice. (I'll skip the defining parts) PS: Correct me if I'm wrong (Cheated on the tranmissions, I forgot about the cash flow channel D:

Monetary Policy can be used to achieve equity in income distribution through the lowering of cash rate at a level that does not promote demand inflation (maintaining low inflation in the 2-3% CPI annually) to stimulate economy activity. Through this, it will affect the price of credit channel, cash flow channel and availability of loans channel. Lowering average costs of production should lead to expansion in Investment and increased consumption due to higher discretionary income which should directly increase the levels of aggregate demand. As a result of this, unemployment will decrease, and thus, allow more people to have greater access to basic good and services, avoid absolute poverty and enjoy a reasonable standard of living.

[Hutchoo]

That's a nice answer It flows really well =)
Thanks

EDIT: Is there some type of real example that you know of that can be applied to this?
Do you need stats/examples with every question?
Edit x2: By loans channel, did you actually mean cash flow channel?

[Water]

Yeah, there some real stats that can be applied to this


During the GFC, the RBA acted to set against the contracting economy through adopting an expansionary stance. This saw a severe decrease from a high cast rate of 7.25% to a low 3.00% over the course of 2009. Unemployment peaked at 5.8% during the GFC, however by 2010, declined to 5.1%. Evidently, a decrease in unemployment, meant that  those who became employed shifted away from unemployment benefits, and enjoyed an increase in disposable income. This has meant a relatively better equitable outcome when compared to the onset of GFC




b) Ava liability of loan channels ... High interest rates = People can't have loans = ridiculous channel = Its part of the course.



PS: Changed: added relative* There's alot of holes in my answer, but thats the jist of it basically

[Saur11]

I am fairly sure that equity is not part of the RBA's charter and is hence unexaminable but good to be prepared nonetheless.

[Hutchoo]

^^ Good point. Just trying to see if I can bullshit get the answer if something like that does come up on the exam!

[BigFunt]

when you talk about external stab + monetary

talk about how maintaining inflation betwee 2-3% means that international competitiveness of firms is steady. Whereas if inflation gets out of hand international competitiveness drops. This means that exports are likely to drop --> reduced balance on trade ---> Improved Current account --> lowered need to borrow ---> low NFD ----> MORE EXTERNALLY STABLE

There is quite an obvious link between equity and monetary policy:

Lower income earners have a higher marginal propensity to spend. This means when inflation they are high, they are more affected. Furthermore, Maintaining inflation in between the target means that that the real purchaing power of income earners is maintained. This is particularly pertinent to low income earners, since they are less likely to have union power to demand for raises in nominal income in the even that inflation does indeed rise. Furthermore, some pensions are not indexed to the CPI hence, by using monetary policy to control inflation, RBA can protect some pension earners from losing income


correct me if im wrong

[chemkid_23]

what do we need to know about current policy mix?? sorry for changing the question that is currently going on atm but I don't really understand what we need to know about it

[Hutchoo]

Romeo Salla (Policy Mix):: "CURRENTLY:
These relatively restrictive settings for both monetary and budgetary policy continued into 2011 despite the negative economic impact stemming from the 2011 natural disasters.  The estimated Budget deficit for 2011-12 will be significantly lower and the RBA is keeping the cash rate at a relatively restrictive level of 4.75%.  The RBA remains focussed on controlling medium term inflationary pressures, despite signs of disinflationary forces at work over the latter part of 2011.  The Government also remains committed to its medium term fiscal strategy, with fiscal consolidation expected to assist RBA efforts to contain any inflationary pressures and to promote ‘sustainable’ growth into the future.  Numerous supply side measures continue to be delivered in order to boost participation and productivity and therefore increase the nation’s productive capacity over time (or prevent it from slowing down or falling in the future – re the carbon tax package)."

Just understand the general trend and be able to go in depth/explain why they would have used this policy mix etcetc.