Question

The pandemic has resulted in a historic decline in output in the Australian and global economy. Australia’s GDP declined by 7% in the June quarter. This is the largest economic fall since the 1930s (RBA 2020).

i. Should the Reserve Bank of Australia (RBA) implement a Contractionary Monetary Policy OR an Expansionary Monetary Policy?

ii. Explain how the selected policy (i) would influence household consumption, private investment, and net exports (X-M) to correct the Australian economy.

( 100-125 words)

Part B

‘An Expansionary Fiscal Policy is likely to cause budget deficits’. Do you agree or disagree with this statement? Discuss this statement using concepts relating to Fiscal Policy.

Answer 1

Part A

i) The reserve Bank of Australia should implement an Expansionary Monetary Policy.

ii) The Expansionary Monetary Policy would influence the following –

• Household Consumption: The RBA encourages commercial banks to give cheaper loans to households. This would result in increase in consumption of households.
• Private Investment: The RBA encourages to give cheaper loan to Private investors, this would incourage them to invest more & thus the private investment increases.
• Net export: RBA encourages banks to give cheaper loans to households, which gives households more disposable income and encourages more spending. Lower interest rates reduce the incentive to save & reduce the value of the Dollar, making exports cheaper and increase export demand.

Part B

An Expansionary Monetary Policy is likely to cause Budget Deficit because the government also goes for Expansionary Fiscal Policy in which Government Spends more than it gets as revenue. The excess expenditure is being borrowed from Commercial banks, private institutions and international institutions which causes the deficiet in Budget where Expenditure more than Revenue. Government does to revive ecomony and this would result in higher GDP growth along with higher inflation.