Question

QUESTION 3: MONETARY POLICY

“There is considerable uncertainty about the near-term outlook for the Australian economy. Much will depend on the success of the efforts to contain the virus and how long the social distancing measures need to remain in place. A very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years.” (Lowe, 2020)

Given the RBAs view of the economy, explain what actions they could take. In your answer focus on the interest rate, consumption and investment.

300-400 words please

Answer 1

COVID-19 has hit most of the economies around the world. In order to stop the spread of the virus strict enforcement of lockdown measures has led to shut down of most of the businesses.

In such difficult times, I think following are the measures that RBA ( Reserve Bank of Australia ) could take to mitigate the negative impact of Covid-19 on the economy.

The Central bank has already brought down the interest rates. Significant drop in the interest rates would infuse liquidity in the economy thereby leading to ease in availability of capital for the businesses and people. Once the economy reopens people and businesses should be able to borrow money from the banks at extremely lower interest rates.

It would incentivise more investment leading to job creation in the economy and a quick economic recovery could be expected. However while doing so, the Central bank must ensure a healthy banking sector by enabling the banks to remain away from bad loans and financial stress on the balance sheet.

Social distancing norms has forced most of the businesses to shut down. Suddenly millions of workers have lost employment which has led to sudden fall in their incomes which in turn has led to a sudden fall in aggregate demand.

Consumption of most of the items has fallen down drastically. However, after reopening of the economy it is expected to see a v-shaped recovery. More money in hands of people would lead to increase in consumer spending leading to higher consumption.

As we know interest rate is the main cost of capital a fall in interest rate and also fiscal measures adopted by the government such as lowering down of taxes should lead to recovery in investment by firms and people.