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i need help with some eco questions

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mand3e:
I'm kind of stumped on some of these questions so any kind of help would be much appreciated :)

1. Discuss what is meant by the 'adverse interest rate' and 'exchange rate effects' of deficit financing.

2. Australia's central bank-the reserve Bank-gained 'operational independence' in 1996.
   a. Explain the meaning of this term (operational independence)
   b. Discuss one advantage and one disadvantage associated with the Reserve Bank having 'operational independence' in its pursuit of medium-term price stability.

3. During 2001, the Reserve Bank reduced the target cash rate 6 times from 6.25% to 4.25%. In 2002 it raised the target cash rate twice to 4.75%.
   a. Explain why this turnaround in policy direction occurred. How effective was each policy phase?
   b. What has been the position on interest rates in 2007-2008?

4. Discuss the nature of the 2 dilemmas involved in implementing microeconomic policy reforms.


i hope i'm allowed to just list questions and (hopefully) get answers.

alright thats it i suppose. thanks for reading? LOL

Collin Li:
The operational independence of the RBA refers to the freedom of the RBA to set interest rates without the approval of the Treasurer. One advantage is that now the RBA is not held hostage by political pandering (i.e: near election times, interest rates would stay low), so that an inflation target can be properly pursued regardless of political agenda. A disadvantage (not sure if this answers the question about price stability), is that the RBA is not directly held accountable by the people.

I guess one disadvantage is that now the RBA is unable to cooperate with the government in installing inflation (perhaps not only using monetary policy). I'd personally argue that the negative effects of political pandering far outweigh this possibility though. Inflation targeting is simply not an attractive political platform when it results in high costs of borrowing for Australian voters.

Collin Li:
Deficit financing is the practice of putting Australia into debt. This puts a higher demand on cash (as debt is the act of borrowing cash), which leads to an increase in the interest rate (which is sort of like the "price" of borrowing cash). This is what is meant by an 'adverse interest rate.' Higher interest rates make the country's money worth more, as foreign investors seek to get higher returns on their money, so the 'exchange rate effects' increase the value of Australian dollars.

Collin Li:
I am not sure about what happened in 2001 and 2002. You have to do your own research on the RBA and its actions. The "yearly history" of Australian central banking doesn't interest me enough to help you out with that, sorry.

To answer the question about dilemmas faced by microeconomic reform:

Microeconomic reform is about improving efficiency, rather than focusing on statistics such as equity and employment. Equity is often in opposition to microeconomic reform because equity often requires tax policy that creates perverse incentives for individuals. The welfare system gives people an incentive to stay home rather than work, which can be a big problem for efficiency if welfare causes a lot of people who would have otherwise been working to start slacking. Employment can also be in opposition to microeconomic reform because changes to competition policy require making jobs less secure in order to invoke more efficient firms.

mand3e:
wow thanks heaps coblin-the only person to respond to my post! LOL

what can i say, your so smart thank-you so much :) and the part where you said "The "yearly history" of Australian central banking doesn't interest me enough to help you out with that, sorry." made me LOL

and thanks again for the help. (P.S: feel free to answer question 3 if you feel like it :D)

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