Sry I didn't have time to follow up since school is about to end and everybody going crazy.
But here's the essay I got 19/20 in trial, plz criticise as much as u can, and tell me whether it deserves this mark.
The question: Examine the current stance of monetary policy in maintaining economic growth and economic stability in the Australian economy.
Answer:
Monetary policy is conducted by the Federal Government's principal monetary authority-- the Reserve Bank of Australia. The main objectives of the RBA is to achieve price stability and full employment which could ensure sustained economic growth in Australia. Monetary policy is mainly changes in interest rate. The RBA uses market operations to influence money supply and determine interest rate in the financial market in order to smooth inflation and fluctuations in the business cycle.
Since financial deregulations started in 1982, the RBA no longer has the power to enforce its interest rate decisions over other banks. Presently, the RBA uses market operations to implement its decisions over interest rate. The RBA holds Exchange Settlement Accounts with all the major banks and financial institutions in Australia. Interest rate is determined by the buying and selling of Commonwealth Government Securities thourgh the ESAs. The RBA sells CGSs when it considers an interest rate rise. By selling CGSs, the RBA reduces the money supply available in the economy, thereby interest rate will rise due to strong demand and less supply. Conversely, the RBA buys back CGSs to lower the interest rate.
The RBA changes interest rate according to its economic forecasting on growth and inflation. The RBA has been trying to maintain inflation rate under 3% since targeting inflation started in 1993. Inflation is the sustained increase in price levels over time and it has been a major problem in Australia. Inflation causes decreasing purchasing power for consumers, rising production costs for producers which would decrease Australia's international competitiveness and reduce economic growth since we export less. Exporters can be forced out of business by inflation because they are not able to pass on the costs to oversea buyers. This also results in deterioration of Australia's Balance of Payments.
The relationship between inflation and ecomomic growth is illustrated by the graph provided on the exam paper (there's a graph, it's the first essay question that's supplied with data). From the graph, it is apparent that economic growth depends on a low inflation rate. Higher interest rate is used to reduce rising inflation because the increased costs of borrowing reduces the level of aggregate demand. But this also reduces economic growth.
The current monetary policy is designed to prevent inflation from rising over the 3% threshold. maintaining inflation is not only important for economic growth, it is also to avoid a hard landing after a decade of strong economic performance. The RBA rised interest rate by 0.25% in May and August to 6% after closely examing the state of the economy. According to RBA's media release, the Australian economy is performing very strongly. Unemployment has been the lowest since the 1960s. It is clear that inflation would rise because of the rising aggregate demand from higher national income. The rise in interest rate could help smooth out excessive economic activities and also correspond to interest rate rises in the USA.
The RBA also hopes to reduce the current account deficit with interest rate rises. Despite a strong terms of trade and booming export revenues, Australia is still running a large amount of current account deficit and foreign liabilities. The government did not address this problem in its 2006-07 budget. Therefore it is the RBA's responsibility to make sure that Australia maintains a strong and stable trade balance. However, the RBA took a cautious approach in rising interest rate after considering the time lag for monetary policies to affect on the economy.
In conclusion, the current monetary stance addresses economic issues related with inflation and external stability. Higher interest rate helps maintain economic growth and stability as it controls inflation and aggregate demand caused by the booming economy.
***************************************************************
I did this essay in around 45 mins. I didn't expect to get band 6 coz I didn't prepare monetary policy.
Plz give ur opinions. Thanks a lot.
