Economics Online Tutoring Solution
Answer 1
Inflation and unemployment are known to be macroeconomic representatives of the economics of any given nation. These two components reflect recession or boom in the economy of the nation. Unemployment and inflation keep changing based on several factors (Anderson 2012).
Inflation in the simpler terms is defined as the phenomenon of rising prices. The level of inflation is represented by the consumer price index and the consumer prices. Inflation is also defined by the expansion of the money supply in the overall economy of the nation. Even if there are mild changes in the velocity of money, it can lead to inflation. There are two main kinds of inflation; cost pull and demand pull inflation (Bernanke, Laubach, Mishkin, & Posen 2001). Cost pull inflation is when three is a response of the businesses for the rise in the costs in the economy. These businesses raise prices to generate profits in the business. There are various reasons that can lead to an increase in the price. These include increase in the price of commodity, raw materials and even an increase in the service charges. On the other hand, an increase in the labor costs can also lead to an increase in the wages, which leads to an overall increase in the production costs. When the levels of unemployment are lower, the wages are even higher which leads to higher inflation. When the indirect taxes imposed by the government are higher, higher are the prices that are passed down by the suppliers to the buyers (Byrne, & Strobl, 2014).
The second kind of inflation, the demand-pull inflation is based on an increase in demand of particular goods and services. When demand in higher and supply remains the same, the situation leads to inflation. This form of inflation is known to be a threat to the economy of the nation when it becomes a reason of a boom in the GDP in the long ruin. When there is depreciation in the exchange rates, it makes the export rates even more competitive and this leads to inflation. On the other hand, the reduction in taxes, an increase in the government demand and an increase in the general level of income can also lead to inflation (Debelle, Stevens, 1995).
The development in the economy of a nation can be measured by the level of unemployment in the nation. Unemployment rate is the measure of the unemployed labor force in a particular time. One of the main ways that define the negative relationship between the unemployment rate and inflation is the Philips Curve. The curve shows that as there is an increase in the rates of unemployment, there is a reduction in inflation. In simpler terms, the greater the unemployment in the nation, the lesser the demands for goods and services by the consumers. This is one of the main reasons that would lead to a fall in the prices and an overall reduction in inflation. On the other hand, the reverse would be the situation when there is a reduction in unemployment (Fernando 2011).
There has been a continuous an a long term debate on inflation and how it effects unemployment in the nation.
Philips curve is another way to analyze the relationship between the two, which shows a negative correlation between the two trends. As compared to the Philips curve that has been shown, a rather new kind of Phips curve has been developed by the new age economists that can be disrupted and changed by the economic policies. Based on this new curve, there is a rise and fall in both unemployment and inflation at the same time. As the unemployment, rates showed an increase on the curve, there was a consequential increase in the inflation (Ilo.org, 2014).
However, these are the models that have seemed to fail. Thereby in these cases the monetary policies seems to come in action. It has been suggested that the changes in the business cycles are a fact and these changes need to be considered by the governments seriously. Thereby one of the main models that have been used for the explanation of the relationship between inflation and rates of unemployment is general equilibrium model. This is the model that examines the factors that have an effect on the economy. These include the exogenous factors, the rates of money supply and the level of productivity being shown by the economy (Layton, Robinson, & Tucker, 2012). One of the main facts that need to be mentioned here is that there are various nature factors in the economy that develop negative relationship between the unemployment rates and inflation. Moreover, this is the negative relationship that cannot be established by the normal business cycles.
In these cases, it has been argued that there is an increase need of the government intervention in order to stabilize inflation and rates of unemployment. For the sustenance of lower levels of unemployment in the nation, there is a need that more jobs are created in the private as well as public sectors and in order to make sure that the demand and supply can be met. On the other hand, it has been seen that the government intervention has a direct effect on the price levels (Mankiw, 2004). The exchange rates that are defined by the country are also linked with the political situation of the country. These are one of the main reasons based on which there are greater changes in the rates of inflation. In most of the cases, it has been seen that the government intervention can also lead to inefficient distribution and allocation of resources, which also leads to worsening of the inflation and unemployment rates. Thereby, there is a need that proper government intervention is planned so that the unemployment and inflation rates can be stabilized (Lopus, 2013).
Answer (b)
In order to measure the health of macro economy of any country there is a need to analyze the situation of inflation in the country. In the case of Australia, it has been mentioned that the economic policymakers plan to maintain the inflation rate of 2 to 3% in order to sustain the economy (Lewis, 2014). There is logic for these figures. One of the main facts that need to be mentioned here is that there are greater issues involved in the determination of the rate of inflation and the degrees that are required for the changes in these rates. the issues aloes effect the now policies that are designed to make decisions on these rates and as to how these policies are to be implemented in order to respond to the sudden changes in the economy. In order to deal with these issues, a consistent framework has been established in order to deal with these issues.
The final rate of inflation needed in the country is equated with the price stability that is achieved in the country in order to calculate the required magnitude of inflation. If there is a sudden shock or change in the economy, it can change the trends. In these cases, there arises a need of new policies with the help of which changes can be stabilized. In these cases, one of the common indicators that are used in the short run is the Philips Curve (Marshall, 2011).
One of the main aims of the monetary policies of Australia is the achievement of inflation rate of 2 to 3%. This is the rate, which will have no effect on the overall growth of the country and resource allocation.
Various monetary policies have the aims for achieving the mentioned rate of inflation in the coming years. It was seen that in the early 90s, there was a significant reduction in the overall rates of inflation. In these cases, the financial targets were designed and implemented accordingly by the Australian government (McEachern, & Lunn, 2003).
One of the main facts that need to be mentioned here is that additional costs are required for the reduction of the rates of inflation down to 3% or more. Some of these costs include deterioration in the overall exchange rates and a further increase in the unemployment rates. As for this reason, it has been planned by the Australian government that there is a need to maintain the lower rates of inflation making sure the rates remain positive. The tarts of inflation are determined along with various other financial trends that include monetary policy neutrality in the future, exchange rates, interest rates and the overall rates of GDP (McEachern, & Lunn, 2003).
There is no doubt about the fact that the Australian nation has a much better economy as compared to the other industrialized nations in the world. This is one of the main countries that have seen higher rates of long-term economic growth with lowest rates of unemployment.
It has been known that Australia is among some of the most well developed countries when compared to the other countries. This is determined by the wealth in the country and the level of opportunities available for the citizens. On the other hand, the inflation rates reflect how the economy of the country is thriving. The unemployment rates in Australia approximately 6%, which is known to be the lowest rates on the global scale. More than 20% of the households of the country are completely dependency on the welfare payments. On the other hand, only 16% of the labor force is living on the work-based wages. There are very few number of people who are unemployed and a very few is working for hours lesser than the required hours (McEachern, 2013).
In these cases, one of the main facts that need to be mentioned here is that there is a need to change the way unemployment is measured. One of the main measures of this index is the willingness to work. On the other hand, growth of the country can also be estimated by the annual number of graduates passing out from the universities of the country. Australia has been known for higher number of graduates, which includes a higher proportion of foreign students. However, one of the main facts that are more troublesome is a higher rate of unemployment in the youth. The unemployment rate among the teens is 16% and the rate is 9% among 24 to 30 year olds (Organisation for Economic Cooperation & Development, 2014).
The booms and recession in the county is measured by the GDP of the country. When the GDP of Australia is taken into account, it has been seen that it has shown a significant increase in US$. GDP is the measure of the overall output and economic growth of the country in terms of national income. The annual expenses on the goods and services of the country are also the measure of the GDP.
It has been seen that there has been a reduction in the GDP of Australia from 4% in 1995 to 2% in 1997 (Pettinger, 2008). Two main economic changes have also added into the GDP based changes in Australia. In 1997, the economic growth accelerated, starting from 4% to more than 21% in 1990 (Pettinger, 2009).
One of the main facts that need to be mentioned here is that the rate of economic growth has remained sustainable based on business investments. The profits generated by the manufacturing firms have been increasing and it has proven to be successful for the economy of Australia. On the other hand, there has been an increased generation of profits in the private corporate sector, which has been one of the main reasons of an increase in the GDP of Australia to more than 15% (Quijano, & Quijano, 2004).
It is said that exporting to the Asian markets is riskier based on an increased level if turbulence in the business environment. On the other hand, there has been an increase in demand of household consumption and a growth in the construction indoors has been one of the main reasons of the growth of the economy. On the other hand, there has been an increase in the trade deficit from 1.25 to .25% in the year 2000. This is because of the manufacturing companies that are gaining more strength in the country with the adjustments of the encage rates and an overall increase in three Australian exports (Rba.gov.au, 2014).
Answer c
Changes in the monetary policy will being changes in the income and in the prices. There are certain changes that occur with the changes in the monetary policies. One of the first changes is the great reduction in the overall interest rates. When there is a reduction in the interest rates, there is a consequential reduction in the overall values of the capital and financial assets because of the lesser rates of return that is obtained from these assets. Consequentially there would be a reduction in interest of the foreigners in the domestic bond, stocks and real estates (Tactic Publications, 2014). There would be a deterioration of the overall financial account because of foreign holdings over all the domestic assets. In these cases, there is chance that the foreign investors would invest overseas in the need of higher rates of return (Taylor, & Woodford, 1999).
With the changes in the monetary policies, there is a reduction in the overall investments by the foreigners in domestic areas, which plays a role in reducing the value of national currency and would play roles in increasing the demand of the currency of the other countries. There would be a great decline in the exchange rate of the country (Tradingeconomics.com, 2014).
In these cases, when there is no government intervention, the overall capital accounts and financial accounts would sum down to zero. When there is a complete declaiming of the financial accounts, there would be improvements in the current by an equal amount. Thereby, from here it can be seen that there would be an overall improvement in the balance of trade. Thereby the imports would become even more expensive and the exports would become increasingly cheaper.
One of the main facts that need to be mentioned here is that the main effect of the expansionary monetary policy is to lower the overall exchange rate, to weaken the financial accounts and to add more strength to the current accounts. On the other hand when the monetary policy is more restrictive, it would play a role in increasing the exchange rate with a much stronger financial accounts and a much weaker current account, which means a less positive balance of trades (Tucker, 2008).
When the income effect is taken into account, there are certain changes that will occur with the expansionary monetary policy. One of the main effects will be seen in the case of domestic GDP. This is the rise on the domestic GDP, which will play roles in an increase in the demand for the imports. When there is a rise in the imports, it will play roils in the deterioration of the current account. With the purchase of more imported goods, there would be a need to increasingly covert the local current into foreign currency. As a result, there would be a reduction of the exchange rate of the domestic currency. In these cases when there is no government invention, there is a need that there is surplus in the financial accounts and the current accounts must go to zero. Based on the increase in the imports, there would be more of national currency available with the foreigners (Pedram, 2011).
Other than this, the most attention is gained by the changes in the unemployment rates of the country with the changes in monetary policy. It has been mentioned that there is a great effect of the monetary policy on the overall money supply as well as the availability of credit for the consumers and the business. The relationship between unemployment and inflation has been mentioned in the previous questions as highlighted by Phillips in 1958. This is the negative relationship between inflation and unemployment based on which the economic policymakers consider the fact that the governments should use monetary policy in order to have effects on the overall unemployment rates (Tucker, 2011).
Thereby there is a direct effect of the monetary policy on the labor markets. As the restrictive monetary policy restricts and dampens the economic growth, there is more pressure on the companies to lay off workers, which increases the rates of unemployment. One of the main responses can be the increase in overall money supply but this could lead to increased price inflation. This can negate the overall effects of money stimulus. In the situation of low rates of unemployment, it can be added here that the economy could be at a risk of overheating as much higher wages are offered by the companies in order to make sure that scarce workers can be attracted. This is the reason based on which there is an increase in the production costs, which leads to much higher retail prices. One of the main responses of the central banks would be to tighten the money policy, which plays a role in slowing the economic growth to a more manageable level (Willett, Chiu, & Walter, 2013).
There are many solutions that have been proposed to deal with the changes in monetary policy and unemployment. One of the main solutions in these cases is to make sure that a stable price system s maintained to make sure that there is more control on the unemployment rates. If monetary policy is used as a tool for the stimulation of economic growth and the creation of more jobs, the only consequence would be more inflation in the end. In these cases, it has been seen that the expansionary monetary policy plays important roles in reducing unemployment and increasing the overall economic growth. This is done by the expansionary monetary policy by lowering the overall interest rates so that easy credit is available for the businesses to make sure they can fight from recession (Kurozumi, 2008).
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