Question

a) Discuss what actions the Government and the RBA should take given the information in the table.

Year	Potential GDP	Real GDP	Inflation
2019	$ 1450 trillion	$1600 trillion	5%

                                                                                                                                                       

b) What could go wrong if the above-discussed policies are implemented?

Answer 1

a)                   

                                The given statistics suggest that the real GDP is more than the potential GDP which means there is an inflation in the economy which is 5% in the given case. As the stable inflation rates are around or less than 2%, the following actions could be taken by the government and the RBA in order to reduce th inflation rates in the economy

Actions to be taken by the government

· The government is expected to implement a contractionary policy so as to reduce the money supply in the economy

· The major contractionary policy implemented by a government is increasing the tax rates which would cause an increased revenue to the government and would result in lowering the money flow in the economy

· The bond prices would be decreased which would reduce the sale of bonds in the market and hence would help in controlling the money flow increases in the economy.

The following actions could be taken by the RBA in order to reduce the inflation and money flow within the economy

· The RBA could resort to increase the rate of interest which would attract investments and decrease the loans and other purchases from the banks which would result in a decrease of money supply in the economy

· The RBA could increase the reserve money to be maintained by the banks at the central bank which would lead to lowering the money available for the banks to lend and hence could decrease the money flow within the economy

· The interest on the bonds could be raised which could cause an increased buying of bonds and thus could result in reduction of money supply

· The discount rates could be reduced which would result in discouraging the banks from borrowing from the central bank and hence could control the money flow

b) The following are expected to be the negative effects if the above mentioned policies are not properly implemented or the negative effects of these policies on the economy

· A decrease in the money flow in the economy would cause a decreased spending and consumption pattern within the economy

· The investment patterns within the economy could be affected on a large scale and hence it could result in a declining production trend which could cause an overall reduction in the GDP levels of the economy in the long run

· There could be reductions in the wages in the short run which could affect the standard of living within the economy

· The banks would lend less and this could result in shortening the manufacturing potential within the economy and would cause considerable effects on the foreign exchange with progress of time.