VCE Stuff > VCE Economics

Help Jess. O understand stuff about economics/ business and such.

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costargh:
Sorry for the essay style answer :P

Interest rates are dictated by the Reserve Bank of Australia (RBA). In that sense, Rudd can't directly alter interest rates because they are at the discretion of the RBA.
You have to understand that monetary policy (changing interest rates) in the past 15 years has primarily been in the pursuit of price stability (inflation between 2-3%). Demand pull inflation occurs when consumers are spending too much instead of saving their earnings. In Australia, on average we actually spend more money per week than we receive in income. Increasing interest rates means that the cost to borrow money will increase and as a result, their should be a decrease in the demand for goods and services, thus lowering inflation.
When this occurs, interest rates may be cut to once again stimulate economic growth and consumer spending.

What you asked about Kevin Rudd doing anything to alter interest rates is sorta complicated but I'll try explain it simply. What the government can do is called budgetary policy which basically outlines the federal governments expected revenues and expenditure for the year. Changes to budgetary policy can help achieve economic objectives such as domestic economic stability (one aspect of domestic economic stability is price stability).
To make it easier to understand, if Rudd wants interest rates to soften, he needs to produce a contractionary budget which is a budget which is in surplus. This means that government revenues exceeds the level of government outlays. This means that MORE money is being taken out of the economy and thus there is less money flowing throughout the economy. This has a contractionary effect on the economy and should help lower economic growth and inflation. This is what the Rudd government has done, it has increased the budget surplus (underlying cash balance) to $21.7 billion.

HERE IS THE LINK:
This should help slow inflation and therefore, the RBA doesn't need to increase interest rates anymore and thus might decrease them.
However, some of the budgetary policy of the Rudd government has gone against their fiscal stance of a large budget surplus. The budget has allowed for tax cuts (changes to the marginal tax brackets) which will mean less revenue for the government and more disposable income (money after tax) for consumers to spend. It can be seen that by giving more money to consumers in a time where they want inflation to drop (from its current level of about 4% to between 2-3%), tax cuts will actually help stimulate economic growth and demand for goods and services.
However inflation is still expected to decrease to about 3.25% because the overall budget is very contractionary.

Finally, interest rate rises can be prevented when inflation is low. So if the Rudd government, through budgetary policy, can keep inflation low, then the chances are that interest rates will stay on hold or drop. One of the most important things to realise is that interest rate rises shouldn't be seen as "bad", because they are necessary. They might seem like they cause people to lose their houses and stuff but they are necessary to help reduce spending and lower inflation, otherwise wage demands will sharply increase also and we will be stuck in a wage spiral.

Fyrefly:
Negative gearing ftw, regarding ur first Q.

Google it.

Costargh has got the rest covered.

costargh:
Yeh good point fyrefly. I haven't actually 'studied' gearing, only heard about it per say and read about it in this article I bookmarked a while ago.
http://money.ninemsn.com.au/article.aspx?id=143509

AppleXY:
Shares or equities is an interesting market.

Basically, when a public corporation in Australia wants to expand their business they may opt to list (also called float) in the  Australian Stock Exchange (ASX) to finance their expansion. When an investor purchases the share/stock/security, the funds  then go to the broker who then forwards the money(capital) towards the corporation. This is the fundamental reason why the equity market exists in the world.

As costa stated, when an investor purchases shares, they have actual part ownership of the corporation. However, everyday investors own such a little percentage of it (unlike banks/other companies called institutional investors) that it is negligible.

As another market, shares are controlled by the factors of supply and demand. A balance between the supply and demand yields the share price (in a pure market, ceteris paribus http://wikipedia.org/wiki/ceteris_paribus).

Of course, when a business is operating relatively well the share price is expected to rise due to the increased demand. However, one of the major myths is where company profits is the sole indicator for the health of the corporation and the underlying determination for an increase or decrease in the share price. This is completely incorrect. Company profits is indeed a huge factor of company health but it's on the only one. Debt levels, dividend levels, revenue levels, future forecasts for the company, risk level (calculated by multiple variables such as asset:liab, other liquidity measures (liquidity is the ability of the business to meet their debts, short or long term, when they fall due ) and others, are determinants of future price rises/falls. However, it's more about the future expectations of business health/profits/revenue. A strong history of good health is indeed a great indicator, however it's more about the future of the business. Would you invest in a corporation that is expected to lose $400M (with revenues of mere $500M and profits (before tax) $200M) from a defunct operation? I don't think so ;) (ABC lost ground due to its high debt level and poor management operations, thus losing signficant ground in the equities market).

Glossary (in plain english lol)

Dividends: In short, when the corporation gives a small percentage of their profits to you for investing in their venture.
Revenue: What a company earns. This can be from sales(for goods based corps) /fees (for service based corps) and interest, but not proceeds from selling a block of land for example.
Expenses: What the company spends. This may include wages, taxes etc but not asset purchases (like computers (macs lol))
EBITA: Earnings before Interest and Amortization (http://wikipedia.org/wiki/Amortization)

This is just the tip of the ice-berg here. There's so much to learn like the different between investing and speculating, other forms of investing (options, derivatives) and so much more.

If you want to learn more, shoot me a PM or send me an email to: [email protected] or add me on MSN. :)

Collin Li:
Incomplete reason: why would an investor purchase the share?

The investor purchases the share because the share has a value that corresponds to the value of the company. The investor wishes to lend his spare money to fund this business' expansion, in the hope of the company growing fast enough, to get a good return. There is also the value of being able to vote over some decisions regarding the company, but that value is almost worthless (especially if the company is majority-owned by someone).

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