ECON 11026 Assessment Item 3- Take Home Paper- Case Study
Due date: Friday of Week 12- Term 2, 2017 (6th October 2017 ) ASSESSMENT
Weighting: 40 % weighting
Length: Approximately 2500 -3000 words 3
Case Study is based on topics covered in weeks 9-11
This assessment item relates to course learning outcomes 1 and 4 as listed in the unit profile.
Task description: In this task, you will build a case study based on the article: RBA decision August, 2017, provided on page 3, along with the link. Guiding questions, found on page 4 of this task sheet will help you structure your response when building the case. Do not forget to apply the DADA framework, using data and graphs to support your response. A marking sheet showing how points are awarded is found on page 5.
Note: Students will have to do some research for this assignment to find some secondary data, tables and graphs from ABS, RBA website related to GDP, unemployment, inflation, exchange rate, interest rates and its impact on consumption demand, commodity prices, business investment and housing market.
Suggested way to approach the task
1. Get a good understanding of macroeconomic objectives, unemployment, inflation, the role of money, monetary policy, interest rates, the Reserve Bank of Australia (RBA), and economic growth from course resources. Refer to relevant chapters from the set textbook and other economics textbooks. Students should refer to textbooks for theory, and other on-line article and news items related to the case study. Draw on the work you have done at home or during workshop session solving the weekly textbook boxed case studies as these will help you learn to think like an economist.
2. Read and take notes about the article RBA decision August, 2017 on page 3 of this task sheet.
3. Look at the guiding questions on page 4 of this task sheet. These will help you apply the theory to a real life monetary policy example of economics at work.
4. Conduct research (find related articles and search the RBA website) relevant to the current situation in the Australian economy and the RBA’s role, function and conduct of monetary policy to keep inflation within the target rate. Find tables and graphs that show the current levels of inflation, interest rates, and money supply and the relationship between inflation, investment, GDP and interest rate, and use these to draw conclusions and justify your answers.
5. Read the How to write essays in economics guide available in the Assessment section of the Moodle site as this will help you adopt the appropriate writing style. Your assignment should have an introduction paragraph regarding the case and respond to the 5 questions located on page 4 of this task sheet within 5 body paragraphs. Be sure to connect the paragraphs with tables and graphs and have a final concluding paragraph.
6. Drawing on your research and notes about RBA decision August, 2017, apply the DADA framework while answering the questions (Definitions: define the key terms; Assumptions: list or make assumptions as required; Diagrams: draw relevant graphs/tables and explain; and original Analysis: apply the theory to real life economic examples and explain to justify your answer). Remember:
a. Concepts and key terms must be defined accurately and completely
b. The assumptions upon which the analysis is based must be stated at the outset.
c. Diagrams must be drawn properly, correctly labelled and the relations they depict explained.
d. Analysis overall should be provided by relating economic theory to how interest rate decisions are made and its impact on the real-life economic.
7. Be sure you fully respond to each of the guiding questions, which are provided to give you a direction, to write and build the case study.
8. Review your draft case study against the marking sheet (page 5) to be sure you have addressed all key criteria. Make sure you have focused on the key macroeconomic objectives and applied macroeconomic concepts and theory to the role of money, banking, inflation, interest rate and the functions of the Reserve Bank of Australia.
9. Sources must be acknowledged using APA referencing style. Make sure you include in-text references to acknowledge others’ work and provide a reference list.
10. Plagiarism is an issue. Do not show your assignment to your classmates.
Article: RBA decision 1st August, 2017
RBA Monetary Policy Background Information http://www.rba.gov.au/
The RBA board meets 11 times a year (not in January) at the RBA in Martin Place, Sydney. Prior to the meeting, board members are provided with analysis of the economy and the financial markets by the RBA staff (prepared by the Economic Analysis Department). Among these analyses are the bank’s forecasts of future inflation, as well as the likely future path of economic growth overseas and domestically. These would be on the basis of ‘no change’ in monetary policy as well as a range of other assumptions. In addition, scenarios are provided as to the likely macroeconomic outcomes if monetary policy was adjusted. The RBA meeting occurs on the first Tuesday of each month. After much discussion, a consensus decision is reached as to whether to leave interest rate unchanged or to adjust these rates. The instrument that RBA uses is the cash rate and, if an adjustment is decided, it will be to adjust the cash rate by 0.25 per cent, 0.50 per cent or 1 per cent. The most common adjustments are 0.25 per cent and 0.50 per cent. Since the last decade, the adjustment has been at 0.25 percent. With the unfolding of GFC, the RBA monetary policy response has been to cut the cash rate six times since September 2008 and cuts have been as large as one per cent. These cuts were designed to help Australia to be able to avoid the synchronised international recession which hit all of the major economies in the 2008-2010 period.
Once the decision is made, the RBA Governor announces its decision and, if a rate adjustment is made, banks will potentially make changes to their interest rates the following day. RBA also publishes the minutes of its Board meetings two weeks after each meeting and also provides quarterly statement on the Monetary Policy. RBA does not set this interest rate (as the commercial bank sets its mortgage rate), but it continuously influences the rate thought its daily financial operations in the money markets. If the RBA buys Treasury notes, the supply of excess reserves in the banking system increases and the cash rate falls. If the RBA sells Treasury notes, the supply of excess reserves in the banking system decreases and the cash rate increases. As a result of these changes in the cash rate, interest rates in general are influenced. In May 2015, RBA cut the official interest rate to 2.0 percent, which remained unchanged for a year. In May 2016, RBA governor announced a cut in cash rate by 0.25 basis point, to 1.75 percent, which remained unchanged until August 2016. The official cash rate since August 2016 is now at historical low of 1.50 percent, and remains unchanged until now June 2017.
Media Release Statement by Philip Lowe, Governor: Monetary Policy Decision
Number 2017-15: Date 1 August 2017 http://www.rba.gov.au/media-releases/2017/mr-17-15.html
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy has picked up a little and is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices have generally risen recently, although Australia's terms of trade are still expected to decline over the period ahead. Wage growth remains subdued in most countries, as dose core inflation. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve expects to increase interest rates further and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively and volatility remains low.
The Bank's forecasts for the Australian economy are largely unchanged. Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent. The transition to lower levels of mining investment following the mining investment boom is almost complete, with some large LNG projects now close to completion. Business conditions have improved and capacity utilisation has increased. Some pick-up in non-mining business investment is expected. The current high level of residential construction is forecast to be maintained for some time, before gradually easing. One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending.
Employment growth has been stronger over recent months, and has increased in all states. The various forward-looking indicators point to continued growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years. Against this, however, wage growth remains low and this is likely to continue for a while yet. The recent inflation data were broadly as the Bank expected. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation.
A factor working in the other direction is increased competition from new entrants in the retail industry. The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Conditions in the housing market vary considerably around the country. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. Investors in residential property are facing higher interest rates. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes. The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
Suggested structure and guiding questions
Introduction: Provide an introduction about the case.
Question 1: Explain the main objectives of monetary policy. List and describe the main
functions of the Reserve Bank of Australia.
Question 2: Why does the RBA take into account the global macroeconomic indicators in major economies like China and USA, including the domestic macroeconomic indicators, when making a decision whether to change (increase or decrease) or keep the official cash rate unchanged? Explain.
Question 3: On 1st August 2017, the Governor of the RBA, Dr. Philip Lowe, decided to leave the official cash rate unchanged at 1.50 percent. Why did the RBA keep the cash rate unchanged?
Question 4: Illustrate and explain using the money market equilibrium model and monetary transmission mechanism how an increase in the cash rate from 1.5% to 2% would help to keep inflation within the target rate and how a further decrease from 1.5% to 1 % in the cash rate would help to stimulate the economy. Describe the circumstances in which the Board might increase and decrease the cash rate. Note: Use GDP, inflation, unemployment, fiscal deficit, and housing market data (which can be obtained from the Australian Bureau of Statistics and RBA websites) from the last 5 years to see the trends, including other global macroeconomic indicators of Australian trading partners when answering this question.
Question 5: What will be the effect of increasing and also further lowering the cash rate in the near future, in particular on consumption demand, business investment, GDP, inflation and housing market? Justify your answer with examples. Is the historically low interest rate of 1.50 percent (since August 2016 until June 2017) sustainable to achieve longrun economic growth? Yes/No, justify your answer with reasons. Note: Students need to give their own views supported and justified by several references and examples.
Conclusion: Provide an overarching conclusion to the case.
Reference list: Use in text citations within your paper to refer to these references ----------------xxx-----------------------