Question

a. The Reserve Bank of Australia has announced a 0.25% decrease in the cash rate. What effects does this have on the economy and the financial markets? Provide examples of who
might benefit from this decrease and those that do not.

b.Explain the Australian dividend imputation credit system and how it applies in Australia. Include an analysis of how the receipt of franking credits will result in differing returns for
Australian resident and international investors.

Answer 1

Answer a) The monetary decision of the reserve bank of Australia comes in form of changes in Cash Rate , the rate clearly indicates the interest rate would charged on over night money that is money market conditions, The decrease in rate by 0.25% will reduce the cost of money in market , which will reduce the cost of loan . The cheaper the loan higher would be flow of fund in financial system.

The decrease in Cash rate would increase the condition of liquidity in economy, which leads to higher demand of products or high rate of inflation in latter stage.

Answer b) The Australian dividend imputation system is a special type of corporate tax system to eliminate double taxation on profit generated in company business. The tax paid by a company on dividend amount should be imputed to the shareholders in form of tax credit , which will reduce the tax liability on distribution. In the previous tax system, the company and shareholders both had benefit of tax on retaining the income with the company.